Brad, finance manager of "Auto One" is making a 12-month business plan.  

Assumptions: # of days = 360; Total Inventory Units = 10,000

Inventory Purchase Cost (order quantity: 10,000) = $9.50 per unit

Inventory Purchase Cost (order quantity: 2,500) = $10 per unit

Fixed Ordering Cost = $100 per order;

Inventory Holding Cost = $5 per unit Ordering Cost and Holding Cost are realized on 360th day

Hurdle Rate = 10%

Brad has two options to order inventory:

o Order and get delivery of total inventory on day 1

o Order and get delivery of 2500 units of inventory on day 1, 90, 180 and 270

A. Calculate NPV of both options ((show all calculations).

B. Which option should Brad chose? Why?

Answer rating: 100% (QA)

To calculate the NPV Net Present Value of both options we need to consider the cash flows associated with each option and discount them to the present ... View the full answer