Report on manufacturing shelving in-home

Presently Dixies is selling two types of shelving, Type A that is superior quality shelving and Type B, which is inferior quality. Due to the recent changes in Australian Economy, the entity is pursuing producing these shelving’s in-home in Australia. A production plant has been considered.

When the entity is producing both the form of shelving in plant, the result is a Net Present Value of $345,962.20 when the initial investment on the plant is $331,993. However, when the entity is switching to producing only Product A, with the reduced initial investment of $301,993 the NPV is reduced to negative $88,396.08. And, in case it is required that the entity shall produce the same NPV as it was producing for both products, the initial investment has to be negative $132,365, which is not possible. Thus, as is clear from the figures, it is beneficial for the entity to produce both the types of products, since the incremental reduction in the initial cost by not producing Type B is lower than the benefit foregone in terms of profit from Type B.

Further, when the pessimistic and optimistic models of performance are considered, with capital investment of $985,000 and $935,000, discount rate of 14% and 10% and increase in demand of product A as 9% and 11% for pessimistic and optimistic models respectively, still the Net Present Value is negative in both cases. And, if a monte carlo simulation is run on the net present value, the result is an all negative NPV. Therefore there is no chance that the entity would produce positive NPV if only Product A is produced.

Thus, it is recommended that the entity shall produce both products and the investment be kept at the initial investment of $331,993 rather than the investment considered in optimistic and pessimistic models.