How come if I reduce the payment to Supplier X in the first year it
reduces the NPV, whereas reducing payments to Supplier Y increases the
NPV?
	
What causes this?

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Request for Question Clarification by omnivorous-ga on 20 May 2004 20:00 PDT

MMP --

This sounds like a riddle.  An accounting/finance riddle, but still a
riddle.  I trust that this is the NPV of a project?

Is there more information or are we supposed to supply a reason for the X/Y events?

Best regards,

Omnivorous-GA

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Clarification of Question by missmallprincess-ga on 21 May 2004 09:20 PDT

It is somewhat of a riddle, isn't it!?  I am running a simulation on
choosing between two suppliers to complete a project.  In the
simulation if I reduce the payment to Supplier X in the first year it
reduces the NPV, whereas reducing payments to Supplier Y increases the
NPV?

I want to know why this is occurring.  I know that they are variables
that you don't know but a general answer is fine.  What are some of
the possibilities for this change in NPV of the project?

MMP --

I'm glad that you clarified this, as I was going to give you a couple
of situations in the real world where this could be true:  One good
example of the NPV increasing would be taking prompt-payment discounts
-- which would be "hidden" from a typical financial model.

Note: reducing supplier payments (in reality, delaying supplier
payments) would always increase NPV even if they irritated valuable
suppliers.

There are other "real world" ways in which it could happen, including
a change in the interest rate at which you're borrowing but I'll take
a guess at this, guessing how your mathematical models might be
working to REDUCE NPV:
?	a simulation might very well be penalizing you with interest charges
on late payments.  Those interest charges are likely far higher than
your own financing, reducing NPV.
?	supplier X may be a "key" supplier that reduces your income. 
Imagine a raw materials supplier: if you reduce purchases from them,
you have less to sell.  In this case Supplier Y is providing something
not in the "direct cost" of product -- perhaps paper for the copier,
coffee for the cafeteria or some other "overhead" item.
?	Suppliers X and Y might be at different points on their own cost
curve (or "learning curve").  If Supplier X isn't expected to lower
prices next year, but Supplier Y is committing to a 20% reduction
after hitting some initial volume, it accounts for the effect.
?	Very similar to the point above, your contract with Supplier X might
be a long-term contract with low pricing over multiple years.  The
contract with Supplier Y might be a short-term (in other words
higher-priced) contract.


Best regards,

Omnivorous-GA