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Proposal 1 PPD IEC has just developed a new electronic device ( called the PPD ) and it believes it will have broad market appeal.

Proposal 1 PPD
IEC has just developed a new electronic device (called the PPD) and it believes it will have
broad market appeal. The company has performed marketing and cost studies that revealed the
following information:
A) New equipment would have to be acquired to produce the device. The equipment would cost
$315,000 and have a six-year useful life. After six years, it would have a salvage value of
about $15,000.
B) Sales in units over the next six years are projected to be as follows:
Year Sales in Units
19,000
215,000
318,000
4622,000
C) Production and sales of the device would require working capital of $60,000 to finance
accounts receivable, inventories, and day-to-day cash needs. This working capital would be
released at the end of the projects life.
D) The devices would sell for $35 each; variable costs for production, administration, and sales
would be $15 per unit.
E) Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation
on the equipment would total $135,000 per year. (Depreciation is based on cost less salvage
value).
F) To gain rapid entry into the market, the company would have to advertise heavily. The
advertising costs would be:
Year Amount of Yearly
Advertising
12 $180,000
3 $150,000
46 $120,000
G) The companys required rate of return in 14%.
Proposal 2 NED
One of your colleagues has provided an analysis of a competing proposal and concluded the
following:
NPV = $120,000; IRR =15.5%; Payback Period =3.5 years, Profitability Index =1.25
Required:
1) Compute the net cash inflow (incremental contribution margin minus incremental fixed
expenses) anticipated from the sale of the PPDs for each year over the next six years.
2) Using the data computed (1) and other data provided in the problem, determine the net present
value, internal rate of return, payback period, and profitability index of the proposed
investment.
3) Using the analysis performed in (2), prepare best and worst case scenarios using the
following assumptions:
a) Best Case Projected sales expectations increase by 10%, required rate of return falls to 7%.
b) Worst Case Projected sales decreases by 10%, required rate of return increases to 15%
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