1. After extensive prototype development and test marketing, TechElectro plc believes it can penetrate the smart watch market. The firm is considering two alternative products. The first is TECH7 with built - in wifi. The second is TECH8 with both wifi and 4G. TECH7 would be introduced at a price of £400 per watch while TECH8 will be sold at £350 per watch . TECH7 is projected to sell 5 00 0 pieces a year, whereas TECH8 would sell 10,000 pieces a year. Cash costs of production are expected to be £150 per watch for TECH7 which for TECH 8 are exp ected to be £170. Both products require furth er investment; TECH7 could be produced using new equipment costing £1 million. That equipment would last 3 years and have no resale value. The machinery required to produce TECH8 would c ost £1 . 2 million and last 3 years. The firm expects th e equipment for TECH8 to have a £ 1 0 0, 000 resale value at the end of year 3. The firm uses the reducing balance (20 % ) depreciation. The firm faces a corporate tax rate of 24 % and believes that the appropriate discount rate is 13 %. By comparing the Net Present Value (NPV) for both projects, suggest which model of watch should the firm produce?

2. TechElectro , in the above question, is also considering another project. The project calls for a major renovation of the company’s manufacturing facilities. The initial investment in the project is £5million while the incremental cash inflow s in the first year are £1 .5 million. Cash inflows are expected to increase by 10 % every year for the next 3 years of the project ’s expected life. T he risk of this project is higher than other projects and it is suggested that a 2% risk premium should be added to the cost of capital u sed for other projects . Calculate the Internal rate of return (IRR) to evaluate the project and indicate whether the project should be accepted or not.