Question

Victor Von Doom would like to expand his influence outside his home country of Latveria and for this reason plans to launch operations in the United States. He is considering two different plans:

• Plan 1 Sign a contract with the United States military to provide humanoid robotic weapons (Doombots) over the course of the next fifteen years. This would require the creation of a manufacturing plant in the US, which would cost $400,000,000 in initial investment. This plant would require highly-skilled personnel, so labors costs would amount to $5,000,000 every year, adjusted for inflation. In order to keep his creations up to date, an overhaul of the plant will be required every five years, costing a fixed $10,000,000 each time. At the end of the contract, all machinery would be scrapped and sold for $4,000,000. The contract stipulates the US military will pay Dr Doom $80,000,000 each year adjusted yearly for inflation.
• Plan 2 Establish himself as a freelancer offering his services to wealthy individuals such as William Fisk or Justin Hammer. Doing so would not require any initial investment, but every year Dr. Doom would have to organize a big conference (Doomsday) to bring together all of his potential customers. This conference would cost $5,000,000 to run each time, adjusted for inflation. Every three years Dr Doom expects to have to launch a new PR campaign to keep his image fresh in the eyes of the US audience. Each campaign would cost a fixed $1,000,000. This plan would go on for fifteen years, after which Dr Doom will reconsider his next steps. The projected annual revenue from these private contracts is $30,000,000 adjusted for inflation.

The projected inflation over the next fifteen years is 3% and Dr Doom's cost of funds is 12 %. Which option should he choose?

Answer 1