20.1 If the switch is made, an extra 100 units per period will be sold at a gross profit of $175 2 130 5 $45 each. The total benefit is thus $45 3 100 5 $4,500 per period. At 2.0 percent per period forever, the PV is $4,500y.02 5 $225,000. The cost of the switch is equal to this period’s revenue of $175 3 1,000 units 5 $175,000 plus the cost of producing the extra 100 units: 100 3 $130 5 $13,000. The total cost is thus $188,000, and the NPV is $225,000 2 188,000 5 $37,000. The switch should be made.
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