Question

Which contract should be chosen to manufacture your product?

MARR : 12 %

Term : 10 years

Annual Production : 100,000 units

Contract A:

$50,000 payment year 0

$40,000 annual payment for the next 10 years.

Production costs : $1.23 per unit

Contract B:

$10,000 payment year 0

Years 1 to 5 : $25,000 Annual Payment

Years 6 to 10 : $20,000 Annual Payment

Production costs : $1.37 per unit

Is this correct? If not please advise.
PW (A) = 50k + 40k (p/a, 12%, 10) - 100k (1.23) (p/a, 12%, 10)

PW (A) = - 418,966

PW (B) = 10k + 25k (p/a, 12%, 5) + 20k (p/f, 12%, 6) (p/a, 12%, 5) - 100k (p/a , 12%, 10) (1.37)

PW (B) = -633,050

Choose Option A since greater PW.

Answer 1

Answer: 3:

to choose the product for manufacturing firstly we will calculate the net present worth of both the products and than we will choose the product which have highest net present value or worth

net present worth of product A is :

PW (A) = 50,000+ 40,000 (p/a, 12%, 10) - 100,000 (1.23) (p/a, 12%, 10)

PW (A) = - 418,966

net present worth of product B is :

PW (B) = 10000 + 25000 (p/a, 12%, 5) + 20000(p/f, 12%, 6) (p/a, 12%, 5) - 100000 (p/a , 12%, 10) (1.37)

PW (B) = -633,050

The net present value of A is greater (less in minus) so we will choose A for manufacturing

this is the correct answer