Question: A pharmaceutical company is evaluating the options for the manufacture of a chemical component in one of its drugs. There are three different locations, and the company needs to choose one of these. The costs of the different options are given in the table below:
|
East Coast |
West coast |
Midlands |
| Land |
$3,000,000 |
$4,000,000 |
$3,500,000 |
| Buildings |
$6,000,000 |
$6,500,000 |
$7,000,000 |
| Equipment and installation |
$9,000,000 |
$10,000,000 |
$11,000,000 |
| Electricity per year |
$4,000,000 |
$5,000,000 |
$4,000,000 |
| Transportation per year |
$8,000,000 |
$6,000,000 |
$9,000,000 |
| Labor per year |
$15,000,000 |
$12,000,000 |
$16,000,000 |
The company will be charged property taxes by the local government at arate of 1% of the value of the land and buildings.The land will have a salvage value of 90%, and the buildings of 50% of their original costs.
If the company uses a discount rate of 12%, and evaluates these types of choices over a life of 15 years, determine the preferred option.