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Question - 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
Year 2
Year 3
Sales Units
Probability
200
0.30
400
0.40
600
0.50
300
500
700
0.20
800
If the additional price is Rs. 15,000 per unit, he expects the following sales:
100
Required - You are required to:
1. Evaluate the pricing alternatives and indicate which is better?
2. Calculate the Net Present Value of the proposal?
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