FM Co. are in the business of surgical furniture. They are considering a proposal to re-design...

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FM Co. are in the business of surgical furniture. They are considering a proposal to re-design a dentist chair which is likely to cost them Rs. 12 lakhs by way of design and tooling work. The revised design is expected to be valid for 3 years and the Company's target return on investment is 12% post-tax. The additional material and other variable costs per unit are estimated to be Rs. 5,000. The Company's marginal tax rate is 40%. The Marketing Manager has 2 alternate proposals for pricing - either Rs. 12,000 additional per unit or Rs. 15,000 additional per unit. If the additional price is Rs. 12,000 per unit, he expects the following sales: Year 1 Sales Units 200 300 400 Probability 0.30 0.50 0.20 Year 1 Sales Units 100 200 300 Probability 0.30 0.50 0.20 Year 2 You are required to: (i) (ii) Sales Units 400 500 600 If the additional price is Rs. 15,000 per unit, he expects the following sales: Year 2 Sales Units Probability 0.40 0.40 0.20 200 300 400 Year 3 Probability 0.30 0.40 0.30 Sales Units 600 700 800 Year 3 Sales Units 200 300 400 Evaluate the pricing alternatives and indicate which is better, and Calculate the Net Present Value of the proposal Probability 0.50 0.30 0.20 Probability 0.30 0.40 0.30 FM Co. are in the business of surgical furniture. They are considering a proposal to re-design a dentist chair which is likely to cost them Rs. 12 lakhs by way of design and tooling work. The revised design is expected to be valid for 3 years and the Company's target return on investment is 12% post-tax. The additional material and other variable costs per unit are estimated to be Rs. 5,000. The Company's marginal tax rate is 40%. The Marketing Manager has 2 alternate proposals for pricing - either Rs. 12,000 additional per unit or Rs. 15,000 additional per unit. If the additional price is Rs. 12,000 per unit, he expects the following sales: Year 1 Sales Units 200 300 400 Probability 0.30 0.50 0.20 Year 1 Sales Units 100 200 300 Probability 0.30 0.50 0.20 Year 2 You are required to: (i) (ii) Sales Units 400 500 600 If the additional price is Rs. 15,000 per unit, he expects the following sales: Year 2 Sales Units Probability 0.40 0.40 0.20 200 300 400 Year 3 Probability 0.30 0.40 0.30 Sales Units 600 700 800 Year 3 Sales Units 200 300 400 Evaluate the pricing alternatives and indicate which is better, and Calculate the Net Present Value of the proposal Probability 0.50 0.30 0.20 Probability 0.30 0.40 0.30

Answer rating: 100% (QA)

Solution i If additional price is 12000 per unit Expected Sales in year one ... View the full answer