You are the CEO of Rahway Engineering and want to accelerate the expected sales growth (payments from customers)
for your new manufacturing control system.
Marketing has proposed expanding both the sales force and advertising to accomplish this.
Expected cash flows prepared by Rahway Engineering's Finance Department are as shown bellow.
Expected Operating Cash Flows
($s in 000s)
Expansion Case
Year	1	2	3	4	5	6
New Control Systems Sold	45	85	125	155	175	185
Price/System	$325	$325	$325	$325	$325	$325
Payments from Customers	$14,625	$27,625	$40,625	$50,375	$56,875	$60,125
Cash-Outflow
Salaries and Benefits	$10,450	$18,275	$20,100	$21,550	$21,900	$23,450
Advertising	$2,675	$2,775	$2,950	$3,085	$3,230	$3,385
Cars for Sales Force	$2,613	$4,569	$5,025	$5,388	$5,475	$5,863
Other	$500	$515	$530	$546	$563	$580
Total Cash-Outflow	$16,238	$26,134	$28,605	$30,569	$31,168	$33,277
Net Operating Cash Flow	($1,613)	$1,491	$12,020	$19,806	$25,707	$26,848
No Expansion Case (Do Nothing)
($s in 000s)
Year	1	2	3	4	5	6
New Control Systems Sold	34	57	76	84	94	96
Price/System	$325	$325	$325	$325	$325	$325
Payments from Customers	$11,050	$18,525	$24,700	$27,300	$30,550	$31,200
Salaries and Benefits	$4,703	$7,310	$8,040	$8,620	$8,760	$10,350
Advertising	$1,204	$1,249	$1,328	$1,388	$1,454	$1,523
Cars for Sales Force	$705	$1,097	$1,206	$1,293	$1,314	$1,553
Other	$335	$345	$355	$366	$377	$388
Total Cash-Outflow	$6,947	$10,000	$10,929	$11,667	$11,905	$13,814
Net Operating Cash Flow	$4,103	$8,525	$13,771	$15,633	$18,645	$17,386
Rahway's CFO has determined a	15%	required rate of return should be used to choose between these alternatives
Part A
(i) What risk factors might the CFO used to lead her to choose the required rate of return shown above?
(ii) Which alternative should the company pursue? Explain your answer

Answer rating: 100% (QA)

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