QUESTION 2 The Board of PCB MedTech Plc. ("PCB") is considering the company's capital investment options for the forthcoming year, and it is evaluating the following three potential capital investment projects: Project A This investment has a similar risk profile to the company's existing capital investments and requires a capital outlay of 60,000 now. 40,000 is for new capital equipment and the balance for increases in working capital. Sales next year (first year of trading) are estimated to be 10,000 units, variable costs are expected to be 6 per unit and the selling price of the product is estimated to be 10 per unit. Due to the anticipated entry of new competitors to the market in Year 2, both the sales price and variable cost per unit are expected to decline by 20% per annum. Likewise, sales volume is expected to fall by 10% per annum. Overheads attributed to the project would remain constant at 15,000 per annum. In year three the project would be terminated, and the working capital investment would be recovered. The capital equipment would be sold off for 25% of its original purchase cost the following year. Fixed costs include an annual charge of 4,000 for depreciation. Project B This is a long-term project in a totally new activity area, involving an immediate outlay of 90,000, which "PCB intends to borrow from its lenders at 8% per annum. "PCB* expects the project to generate net cash profits of 12,000 next year (first year of trading), rising thereafter by 3% per annum in perpetuity. Project C This is another long-term investment, also in a totally new area, involving an immediate outlay of 25,000. Expected annual net cash profits are as follows: Years 1 to 4: 3,000 Years 5 to 7: 5,000 and Year 8 onwards in perpetuity 7,000 The company discounts all projects of ten years duration or less at a cost of capital of 10% and all other projects at 13% REQUIRED Q1(a) Calculate the Net Present Value (NPV) for each project and advise the board of "PCB as to which investment should be undertaken. Justify your answer appropriately [15 marks] Q1(b) Calculate the Internal Rate of Return (IRR) for investment A (you may use 25% as the upper limit if you wish) and comment accordingly [5 marks) Q1(c) Advise the Board as to whether it should use a Skimming or a Penetration Pricing strategy for the launch of its new product (Project A above) and explain the rationale for your choice of policy [5 marks] [TOTAL MARKS: 25 [End of Question 2]