A manufacturing firm redesigns its premier product to benefit from material standardization. This will entail re-tooling its manufacturing facility. The firm conducts a cost analysis using net present value (NPV) and considers four options. Option 1 is to make no change at all. Options 2, 3, and 4 represent different re-tooling configurations. The discount rate for NPV calculation is 10% per annum, and material costs are fixed for the next 3 years. The firm follows a three-year planning cycle and wishes to apply NPV over that time period to the calculations:
Option 1Option 2Option 3Option 4
Re-tooling Costs$0$500,000$800,000$950,000
Annual Material Costs$1,100,000$900,000$800,000$750,000
NPV = £ r.i (l*r/
What is the 3-year NPV of the best option’
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