Question

Southern specialty products has production facilities in Mississippi and Japan. Both facilities have capacities of 2 million units each per year. The cost of production and distribution of party supplies from Mississippi is $0.25/unit. The cost of production and distribution from Japan is 25 Yen/unit. (Assume that the current exchange rate is $1=110 Yen). Over the next two years the exchange rate is expected to strengthen by 7.5% with a 0.5 probability and weaken by 7.5% with a probability of 0.5 . The expected demand this year is about 3.5 million units. Over the next two years the demand is expected to increase by 10% with a probability of 0.5 and decrease by 8% with a probability of 0.5 . If demand is more than the capacity of the two plants the the remaining supplies are acquired from a

What is the NPV of total cost with the current manufacturing setup?

Answer 1

To calculate the NPV of total cost with the current manufacturing setup, estimate future costs based on probabilities of exchange rate and demand changes, discount them to present values, and sum them up.

Step-by-step explanation:

The Net Present Value (NPV) of total cost can be calculated by taking into account the cost of production and distribution from both the Mississippi and Japan facilities, as well as the expected exchange rate and demand fluctuations. The NPV is the present value of the expected future costs, discounted at an appropriate rate. To calculate the NPV, we need to estimate the future costs based on the probabilities of exchange rate and demand changes, and then discount them to their present values using an appropriate discount rate. Finally, we sum up all the present values to get the NPV of total cost.