A company has received an order for four sophisticated hardware units for an orbiting platform. The purchaser will take delivery of one unit starting 1 year from now, and one unit at the end of each succeeding 3 years (4 units total over four years). They will not take delivery ahead of time. The company can make the units ahead of time, if they prefer, and store them at no cost for later delivery. The company has capacity to make up to 4 units in any single year.
The only pertinent cost in making the units is labor at $100 per hour. All units made in the same year are subject to an 80% learning rate for the hours required, and the first unit requires 10,000 hours of labor. Learning occurs only within a year and is not carried over from one year to another.
To simplify the NPV calculations, consider labor costs to occur as of the end of each year. If the cost of money is 16% per year, determine the production schedule with the overall lowest net present value (discounted) cost. That is what production schedule delivers the required one unit per year to the client at the minimum cost to the company