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 then the remaining supplies are acquired from a competitor for $0.8/unit.

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

Answer 1

To calculate the NPV of the total cost with the current manufacturing setup, consider the annual cost of production and distribution, expected demand, and additional costs in case of excess demand. Discount the costs over the next two years to calculate the NPV.

Step-by-step explanation:

To calculate the NPV (Net Present Value) of the total cost with the current manufacturing setup, we need to consider various factors. The first step is to calculate the annual cost of production and distribution from each facility based on the expected demand. For the Mississippi facility, the cost per unit is $0.25, and for the Japan facility, it is 25 Yen, which is equivalent to $0.227 based on the exchange rate of $1=110 Yen.

Next, we need to calculate the expected demand for each year. In the current year, the expected demand is 3.5 million units. For 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. Based on these probabilities, we can calculate the expected demand for each year.

If the demand exceeds the capacity of the two plants, the remaining supplies are acquired from a competitor for $0.8 per unit. Therefore, we need to calculate the additional cost in case of excess demand.

Finally, we can calculate the NPV of the total cost by discounting the annual costs and additional costs over the next two years using the appropriate discount rate.