NVIDIA is headquartered in Santa Clara, California, and became a major force in the computer gaming industry with the launch of the RIVA series of graphics processors in 1997. To date, the company has become the world’s leading graphic card manufacturer with a wide product range. In 2022, the production plant of NVIDIA’s major supplier in Delaware producing the graphic processing units was damaged by a big fire which would negatively impact the production capability of the plant in the immediate future.

The management of NVIDIA must decide to either stay with the supplier in Delaware or source from an alternative supplier in Mexico for the coming three years. In both options, NVIDIA will incur an initial cost (at present value) but expects to get some savings every year.

The expected cost of sourcing a new supplier in Mexico, upgrading its production equipment, and implementing the necessary quality assurance procedures is estimated at $5 million. Once in place, this partnership is expected to yield savings in the next three years as shown in Table 1. The discount rate for this alternative is 3%.