The company is evaluating two specific proposals to market a new product. The current interest rate is 10 %.
Proposal A calls for setting up an in-house manufacturing shop to make the product, requiring an investment of $500,000. The expected profits for the first to fifth years are $150,000, $200,000, $150,000, and $100,000, respectively.
Proposal B suggests that the manufacturing operation be outsourced by contracting an outside shop, requiring a front-end payment of $300,000. The expected profits for the first to fifth years are $50,000, $150,000, $200,000, $300,000, and $200,000, respectively. The expected profits would be lower in early years due to third-party markup. Which proposal should the company accept?