As the vice president of engineering of the Best Company in Buffalo, you need to

make a decision regarding how a new product is to be manufactured. You have

been offered two specific proposals. Proposal A is to set up an assembly operation

in-house and to outsource the production of all subassemblies and parts

to supply chain partners. This proposal would need a front-end investment of

$2,000,000 for the assembly operations, an investment of $300,000 for the product

design and development efforts, and another $100,000 for managing and coordinating

the supply chain partners. The projected net profits for the products

manufactured by this method are $0, $300,000, $600,000, $900,000, $1,200,000,

and $600,000 in the first, second, third, fourth, fifth and sixth year, respectively.

There is no salvage value of the assembly equipment at the end of the sixth year,

at which time the sales of this product will be terminated. Interest is at 5.0%.

Proposal B is to build a production facility to manufacture all subassemblies

and assemble the products in-house. This proposal would need a front-end investment

of $3,000,000, which includes facility, equipment, engineering, and all other

required efforts. The projected net profits for the products manufactured by this

method are $200,000, $400,000, $800,000, $1,200,000, $1,000,000, and $600,000 for

the first, second, third, fourth, fifth, and sixth year, respectively. There is a salvage

value of $400,000 of the facility at the end of the sixth year. Interest is also at 5%.

Which proposal should you accept, and why?

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