Question

Your computer manufacturing firm must purchase 20,000 keyboards from a supplier. One supplier demands a payment...

Your computer manufacturing firm must purchase 20,000 keyboards from a supplier. One supplier demands a payment of $195,000 today plus $10 per keyboard payable in one year. The risk-free interest rate is 5% (the firm may also borrow at this rate). Another supplier will charge $21 per keyboard, also payable in one year.

  1. Which offer should your firm take?
  2. Suppose the computer manufacturing firm does not have cash to pay upfront. What the firm should do and which offer should it take? Explain, provide necessary computations
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Answer #1

We will be comparing the net present value-

Net present value of alternative 1= (195000)+(2,00,000)/1.05= $ 385476

Net present value of alternative 2= (20000*21)/(1.05)= 4,00,000

lower of the both will be selected because it will be resulting into lower payment.

Hence the net present value of ALTERNATIVE ONE is BETTER so the firm will be trying to acquire it from first supplier who is demanding a payment of 195000 today and $10 par keyboard payable in 1 year.

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