Application of Divisional Hurdle Rates The application of the new system got its first test when the auto airbags production division and the aerospace division simultaneously submitted four proposals. Proposal A: The auto airbags production division submitted a proposal for a new airbag model that would cost $3,050,000 to develop. The anticipated revenue stream for the next 10 years was $720,000 per year. Proposal B. The aerospace division proposed the development of new radar surveillance equipment. The anticipated cost was $3,100,000. The anticipated revenue stream for this project was $750,000 per year for the next 10 years. Proposal C. This was a second proposal from the auto airbags production division. It called for special equipment to be used in the disposal of environmentally harmful waste material created in the manufacturing process. The equipment cost $225,000 and was expected to provide cost savings of $30,000 per year for 15 years.

Proposal D. This was a second proposal from the aerospace division. It called for the development of a new form of a micro electric control system that could be used for fighter jets that were still in the design stage at another aerospace company. If the other aerospace company was successful in the development of the fighter jets, they would be sold to underdeveloped countries in various sectors of the world. The cost to produce the micro electric control system was $1,700,000 and the best-guess estimate was that the investment would return $500,000 a year for the next eight years.

a. Which proposals should be accepted or rejected? Use an appropriate divisional discount rate. Do you agree with the discount rates assigned by Marlene Davidson?

b. What subjective elements might override or influence any of the answers determined by quantitative analysis?

c. Assume the head of the aerospace division asked for a second review on the new radar surveillance equipment (proposal B). He maintains that the numbers presented in proposal B are correct, but he wants you, the analyst, to know that $300,000 has already been spent on the initial research on this project. (It's not included in the 3,100,000.) He suggests that this might influence your decision. What should be your response?