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1. Paignton Electronics is interested in expanding its market by introducing a new fuel savings device that attaches to electrically powered industrial vehicles. The device, code named "AF86," promises to save up to 15 percent of the electrical power required to operate electric forklifts. Paignton expects that the modest demand expected during the introductory year will be followed by a steady increase in demand in subsequent years. The extent of this increase in demand will be based on customer's expectations regarding the future cost of electricity, which is shown in the table below. Paignton expects to sell the device for $500 each, and does not expect to be able to raise its price over the foreseeable future. EXPECTED DEMAND OF THE DEVICE IN UNITS/YEAR Small Increases in the Large Increases in the Cost of Electrical Power Cost of Electrical Power 1,000 10,000 Year 1 2 8,000 5,000 1,000 3 15,000 4 15,000 20,000 30,000 5 18,000 Paignton is faced with two alternatives: Alternative 1: Make the device themselves, which requires an initial outlay of $250,000 in plant and equipment and a variable cost of $75 per unit. Alternative 2: Outsource the production, which requires no initial investment, but incurs $300 cost per unit. a) Assuming small increases in the cost of electrical power, compute the cash flows for each alternative. Over the next 5 years, which alternative maximizes the NPV of this project if the discount rate is 10%? b) Assuming large increases in the cost of electrical power, compute the cash flows for each alternative. Over the next 5 years, which alternative maximizes the NPV of this project if the discount rate is 10%? 1. Paignton Electronics is interested in expanding its market by introducing a new fuel savings device that attaches to electrically powered industrial vehicles. The device, code named "AF86," promises to save up to 15 percent of the electrical power required to operate electric forklifts. Paignton expects that the modest demand expected during the introductory year will be followed by a steady increase in demand in subsequent years. The extent of this increase in demand will be based on customer's expectations regarding the future cost of electricity, which is shown in the table below. Paignton expects to sell the device for $500 each, and does not expect to be able to raise its price over the foreseeable future. EXPECTED DEMAND OF THE DEVICE IN UNITS/YEAR Small Increases in the Large Increases in the Cost of Electrical Power Cost of Electrical Power 1,000 10,000 Year 1 2 8,000 5,000 1,000 3 15,000 4 15,000 20,000 30,000 5 18,000 Paignton is faced with two alternatives: Alternative 1: Make the device themselves, which requires an initial outlay of $250,000 in plant and equipment and a variable cost of $75 per unit. Alternative 2: Outsource the production, which requires no initial investment, but incurs $300 cost per unit. a) Assuming small increases in the cost of electrical power, compute the cash flows for each alternative. Over the next 5 years, which alternative maximizes the NPV of this project if the discount rate is 10%? b) Assuming large increases in the cost of electrical power, compute the cash flows for each alternative. Over the next 5 years, which alternative maximizes the NPV of this project if the discount rate is 10%