ABC Ltd. manufactures and sells product P. ABC is currently thinking whether it can outsource the production of product P to WeRforU or continue in-house production.

ABC found that in 2022, the unit production cost of P is $25, WeRforU will sell each unit of P at $30 to ABC. Operations Manager of ABC has forecasted the demand for P in 2022 as follows: demand may be 22,000 units with probability 0.6, or 20,000 units with probability 0.4.

ABC expects that the demand and WeRforU price for P in 2023 will be follows:

• demand may go up by 20% of 2022 demand with a probability of 0.7 or go down by 10% of 2022 demand with a probability 0.3
• unit price of P at WeRforU may go up by 10% of 2022 price with a probability of 0.3, go down by 20% of 2022 price with a probability of 0.2, or the same as 2022 price with a probability of 0.5.

Unit production cost will stay at $25 in 2023. The annual fixed cost at ABC if P is produced in-house is $30,000. ABC uses 15% discounting factor. Assume all costs incur at the beginning of each year.

1. Find the NPV of the total cost of two years if ABC outsources product P in 2022 and 2023.
2. Find the NPV of the total cost of two years if ABC makes P in-house in 2022 and 2023.