A bicycle manufacturer currently produces 269,000 units a year and expects output levels to remain steady...

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A bicycle manufacturer currently produces 269,000 units a yearand expects output levels to remain steady in the future. It buyschains from an outside supplier at a price of $ 1.90
a chain. The plant manager believes that it would be cheaper tomake these chains rather than buy them. Direct? in-house productioncosts are estimated to be only $ 1.50
per chain. The necessary machinery would cost $286,000 and wouldbe obsolete after ten years. This investment could be depreciatedto zero for tax purposes using a?ten-year straight-linedepreciation schedule. The plant manager estimates that theoperation would require $22,000 of inventory and other workingcapital upfront? (year 0), but argues that this sum can be ignoredsince it is recoverable at the end of the ten years. Expectedproceeds from scrapping the machinery after ten years are $21,45 Ifthe company pays tax at a rate of 35% and the opportunity cost ofcapital is 15 % what is the net present value of the decision toproduce the chains? in-house instead of purchasing them from the?supplier?
_________________________________________________
Project the annual free cash flows
?(FCF?)
of buying the chains.
The annual free cash flows for years 1 to 10 of buying thechains is $_ (Round to the nearest dollar. Enter a free cashoutflow as a negative? number.)
Compute the NPV of buying the chains from the
FCF.
The NPV of buying the chains from the FCF is ?$__?(Round tothe nearest dollar. Enter a negative NPV as a negative?number.)
Compute the initial FCF of producing the chains.
The initial FCF of producing the chains is $_?(Round to thenearest dollar. Enter a free cash outflow as a negative?number.)
Compute the FCF in years 1 through 9 of producing thechains.
The FCF in years 1 through 9 of producing the chains is$(Round to the nearest dollar. Enter a free cash outflow asa negative? number.)
Compute the FCF in year 10 of producing the chains.
The FCF in year 10 of producing the chains is $?(Round tothe nearest dollar. Enter a free cash outflow as a negative?number.)
Compute the NPV of producing the chains from the FCF.
The NPV of producing the chains from the FCF is $? (Round tothe nearest dollar. Enter a negative NPV as a negative?number.)
Compute the difference between the net present values foundabove.
The net present value of producing the chains? in-house insteadof purchasing them from the supplier is $__(Round to thenearest? dollar.)

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Transcribed Image Text

A bicycle manufacturer currently produces 269,000 units a yearand expects output levels to remain steady in the future. It buyschains from an outside supplier at a price of $ 1.90a chain. The plant manager believes that it would be cheaper tomake these chains rather than buy them. Direct? in-house productioncosts are estimated to be only $ 1.50per chain. The necessary machinery would cost $286,000 and wouldbe obsolete after ten years. This investment could be depreciatedto zero for tax purposes using a?ten-year straight-linedepreciation schedule. The plant manager estimates that theoperation would require $22,000 of inventory and other workingcapital upfront? (year 0), but argues that this sum can be ignoredsince it is recoverable at the end of the ten years. Expectedproceeds from scrapping the machinery after ten years are $21,45 Ifthe company pays tax at a rate of 35% and the opportunity cost ofcapital is 15 % what is the net present value of the decision toproduce the chains? in-house instead of purchasing them from the?supplier?___________________________________________________Project the annual free cash flows?(FCF?)of buying the chains.The annual free cash flows for years 1 to 10 of buying thechains is $_____ (Round to the nearest dollar. Enter a free cashoutflow as a negative? number.)Compute the NPV of buying the chains from theFCF.The NPV of buying the chains from the FCF is ?$______?(Round tothe nearest dollar. Enter a negative NPV as a negative?number.)Compute the initial FCF of producing the chains.The initial FCF of producing the chains is $_____?(Round to thenearest dollar. Enter a free cash outflow as a negative?number.)Compute the FCF in years 1 through 9 of producing thechains.The FCF in years 1 through 9 of producing the chains is$________(Round to the nearest dollar. Enter a free cash outflow asa negative? number.)Compute the FCF in year 10 of producing the chains.The FCF in year 10 of producing the chains is $______?(Round tothe nearest dollar. Enter a free cash outflow as a negative?number.)Compute the NPV of producing the chains from the FCF.The NPV of producing the chains from the FCF is $____? (Round tothe nearest dollar. Enter a negative NPV as a negative?number.)Compute the difference between the net present values foundabove.The net present value of producing the chains? in-house insteadof purchasing them from the supplier is $______(Round to thenearest? dollar.)