A Northwest party products manufacturer has production facilities in Spokane, WA and Bangladesh. Both facilities have capacities of 1 million units each per year. The cost of production and distribution of party supplies from Spokane is $1/unit. The cost of production and distribution from Bangladesh is 60 Taka/unit. (Current exchange rate is $1=85 Taka). Over the next two years the exchange rate is expected to strengthen by 10% with a 0.5 probability and weaken by 10% with a probability of 0.5.

 

The expected demand this year is about 1.8 million units. Over the next two years the demand is expected to increase by 10% with a probability of 0.5 and decrease by 5% with a probability of 0.5. If demand is more than the capacity of the two plants then the remaining supplies are acquired from a competitor for $2/unit.

1. What is the NPV of total cost with the current manufacturing setup?
2. The company is considering increasing the capacity of the Bangladesh plant by 500,000 units at a fixed cost of $1 million. The fixed cost will be incurred this year. What is the NPV of the revised setup? 
3. Should They do it? Assume that the company uses a 10% discount rate.

Answer rating: 100% (QA)

Ary Given that Capacity Imillion Imillion Cost to praducti... View the full answer