Reliable is debating whether to add 2 million units or 1.5 million units of capacity to the Asia plant. The larger plant increase will cost $18 million, whereas the smaller addition will cost $15 million. Assume that Reliable users a discount factor of 10 percent. What do you recommend?

Question

Business

Bernard Rush

14 August, 14:14

Reliable is debating whether to add 2 million units or 1.5 million units of capacity to the Asia plant. The larger plant increase will cost $18 million, whereas the smaller addition will cost $15 million. Assume that Reliable users a discount factor of 10 percent. What do you recommend?

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Ismael · Answer 1

10% of 18 million = 1.8 million for 2 million units

10% of 15 million = 1.5 million for 1.5 million units

For 2 million units at 10 percent discount you would spend

18 million - 1.8 million = 16.2 million

For 1.5 million units at 10 percent discount you would spend

15 million - 1.5 million = 13.5 million

You have a shortfall of 500 000 units between spending 16.2 million and 13.5 million.

My strong recommendation will be to use $15 million.