<p>Manufacturing costs from a scrapped poor-quality product are $6000 per year.

Question

<p>Manufacturing costs from a scrapped poor-quality product are $6000 per year. An investment in an employee training program can reduce this cost.</p>
<p>Program A reduces the cost by 75% and requires an investment of $12000</p>
<p>program B reduces the cost by 95% and will cost $20000.</p>
<p>Based on low turn-over at the plant. Either program should be effective for the next five years.</p>
<p>If interest is 20%, the present worth of the two programs are nearest to what values(Consider cost reduction a positive cash flow)?</p>

Explanation / Answer

We see that Prog A will give an annual CF of 75%*$6000 = $4500 Prog B will give annual CF of 95%*$6000 = $5700 Disc Rate Kd = 20% So PV of Annuity of $1 for 5 yrs with Kd = 20% is 2.9906 So NPV of Prog A = CF0+CF1+ ....+Cf5 = -12000+2.9906*4500 = $1,458 So NPV of Prog B= CF0+CF1+ ....+Cf5 = -20000+2.9906*5700 = $(2,954) So Prog A is more effective as it gives a Positive NPV

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