the initial decision after receiving the input from her boss and the three division heads, mary antoine decided to go with the following system. the weighted average cost of capital of 12 percent for the entire corporation would be the starting point for the corporation. the airline parts manufacturing division would continue to use 12 percent as its discount rate. because firms comparable to the auto airbags production division had an average beta* of .8 and the division itself had fewer variable earnings from year to year than the corporation, it would be assigned a discount rate of 10 percent. the head of the aerospace division was displeased to be assigned a discount rate of 15 percent. mary antoine justified the high hurdle rate based on an average beta of 1.35 in the aerospace industry and the highly risky business of dealing with the government. contracts were often cut back when a new administration came into power. 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 $2,550,000 to develop. the anticipated revenue stream for the next 10 years was $425,000 per year. proposal b the aerospace division proposed the development of new radar surveillance equipment. the anticipated cost was $2,647,000. the anticipated revenue stream for this project was $475,000 per year for the next 10 years. proposal c proposal c was a second proposal from the auto airbags 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 $154,860 and was expected to provide cost savings of $25,000 per year for 15 years. proposal d proposal d was a second proposal from the aerospace division. it called for the development of a new form of 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 $1,626,500 and the best guess estimate was that the investment would return $325,000 a year for the next eight years. required 1. compute the internal rate of return and the net present value for each of these four proposals. 2. based strictly on the calculations, which proposals should be accepted or rejected. use the appropriate divisional discount rate. the net present value provides the answer directly while the internal rate of return must be compared to the discount rate (which is the same as the required rate of return). 3. what subjective elements might override or influence any of the answers provided to question 2? 4. 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 $350,000 has already been spent on the initial research on this project. he suggests that this might influence your decision. what should be your response? you must show all calculations in excel. you must provide answers to the critical thinking questions in well developed, paragraph form.
