Answer:
Explanation:
The two choices under consideration are building 4 million units of capacity in North America
YEAR 1 2 3
Production and Sales 4,000,000.00 4,000,000.00 4,000,000.00
Variable cost @ 10 40,000,000.00 40,000,000.00 40,000,000.00
Divide by:
Conversion Factor 1.33 1.33 1.33
Multiply by:
Growth(.1*.5)+(-.05*.5) 1.025 1.025^2 1.025^3
NET CASHFLOWS 30,827,068.00 31,597,744.00 32,387,688.00
DCF @ 10% 0.909090909 0.83 0.75
Present Values 28,024,607.27 26,113,838.02 24,333,349.36
NET TOTAL COST 78,471,794.65
or building 2 million units of capacity in each of the two loca-tions. Building two plants will incur an additional one-time cost of $2 million.
YEAR 0 1 2 3
Production and Sales 4,000,000.00 4,000,000.00 4,000,000.00
Variable cost @ [(10+9)/2] 38,000,000.00 38,000,000.00 38,000,000.00
Additional cost 2,000,000.00
Conversion Factor 1.33 1.33 1.33 1.33
Growth(.1*.5)+(-.05*.5) 1.025 1.025^2 1.025^3
CASHFLOWS 1,503,759.40 29,285,714.29 30,017,857.00 30,768,304.00
DCF @ 10% 1 0.909090909 0.826446281 0.751314801
Present Value 1,503,759.40 26,623,376.62 24,808,146.28 23,116,682.19
NET TOTAL COST = 76,051,964.50
DECISION: The manufacturer should build 2 plants in 2 different locations because it gives a lower net present cost
<u>At what initial cost differential from building the two plants will the chemical manufacturer be indifferent between the two options?</u>
The difference in both options came from the fact that variable cost is lower in Europe and building the plant is more expensive. If there is no increase in cost and variable cost is same everywhere, then both options will be same.
