On January $11,2016,$ the finance committee of Hargai Plastic Molding Company $($HPMC$)$ met to consider eight capital$-$budgeting projects. Present at the meeting were Ramlee Gagah, president and founder, Susana Johan, Comptroller, and Cheng Wok, head of research and development. Over the past five years, this committee has met every month to consider and make final judgment on all proposed capital outlays brought up for review during the period. Hargai Plastic Molding Company was founded in $1998$ by Ramlee Gagah to produce

plastic parts and molding for the Tanjung Malim automakers. For the first ten years of operations, HPMC worked solely as a subcontractor for the automakers, but since then has made strong efforts to diversify in an attempt to avoid the cyclical problems faced by the auto industry. By $2016,$ this diversification attempt has led HPMC into the production of over $1,000$ different items, including kitchen utensils, camera housings and photographic equipment. It also led to an increase in sales of $800$ percent during $2006-2016$ periods. As this dramatic increase in sales was paralleled by a

corresponding increase in production volume, HPMC was forced, in late $2004,$ to expand production facilities. This plant and equipment expansion involved capital expenditures of approximately $$10\mathrm{.}5$ million and resulted in an increase of production capacity of about $40$ percent. Because of this increased production capacity, HPMC has made a concerted effort to attract new business and consequently has recently entered into contracts with a large toy firm and a major discount department store chain. While non$-$auto$-$related business has grown significantly, it still only represents $32$ percent of HPMC$$s overall business. Thus, HPMC has continued to solicit nonautomotive business, and as a result of this effort and its internal research and development, the firm has four sets of mutually exclusive projects to consider at this month$$s finance committee meeting.Over the past ten years, HPMC$$s capital$-$budgeting approach has evolved into somewhat elaborate procedure in which new proposals are categorized into three areas: profit, research and development, and safety. Projects falling into the profit or research and development areas are evaluated using present value techniques, assuming a $10$ percent opportunity rate $($cost of capital$)$; those falling into the safety classification are evaluated in a more subjective framework. Although research and development projects have to receive favorable results from the present value criteria, there is also a total dollar limit assigned to projects of this category, typically running about $$750,000$ per year. This limitation was imposed by Hargai primarily because of the limited availability of quality researchers in the plastic industry. Hargai felt that if more funds than this were allocated, $$we simply couldn$$t find the man power to administer them properly.$$ The benefits derived from safety projects, on the other hand, are not in terms of cash flows; hence,

present value methods are not used at all in their evaluation. The subjective approach used to evaluate safety project is a result of the pragmatically difficult task of quantifying the benefits from these projects into dollar terms. Thus these projects are subjectively evaluated by a management$-$worker committee with a limited budget. All eight projects to be evaluated in January are classified as profit projects.

The first set of projects listed on the meeting$$s agenda for examination involve the utilization of HPMC$$s precision equipment. Project A calls the production of vacuum containers for thermos bottles produced for a large discount hardware chain. The containers would be manufactured in five different size and color combinations. This project would be carried out over a three$-$years period, for which HPMC would be guaranteed a minimum return plus a percentage of the sales. Project B involves the manufacture of inexpensive photographic equipment for a national photography outlet. Although HPMC currently has excess plant capacity, each of these projects would utilize precision equipment of which the excess capacity is limited$.$ Thus, adopting either project would tie up all precision facilities. In addition, the purchase of new equipment would be both prohibitively expensive and involve a time delay of approximately two years, thus making these projects mutually exclusive. $($The cash flows associated with these two projects are given in Exhibit $1.)$ EXHIBIT $1.$ Hargai Plastic Molding Company

CASH FLOW

Year Project A Project B

$0$ $$-75,000$ $$-75,000$

$110,00043,000$

$230,00043,000$

$3100,00043,000$

The second set of projects involves the renting of computer facilities over a one$-$year period to aid in customer billing and perhaps inventory control. Project C entails the evaluation of customers billing system proposed by Advanced Computer Corporation. Under this system all the bookkeeping and billing presently done by HPMC$$s accounting