A bicycle manufacturer currently produces 274 000 units a yearand expects output levels to remain steady in the future. It buyschains from an outside supplier at a price of $ 1.80 a chain. Theplant manager believes that it would be cheaper to make thesechains rather than buy them. Direct​ in-house production costs areestimated to be only $ 1.50 per chain. The necessary machinerywould cost $ 242000 and would be obsolete after ten years. Thisinvestment could be depreciated to zero for tax purposes using a​ten-year straight-line depreciation schedule. The plant managerestimates that the operation would require $ 33000 of inventory andother working capital upfront​ (year 0), but argues that this sumcan be ignored since it is recoverable at the end of the ten years.Expected proceeds from scrapping the machinery after ten years are$ 18150. If the company pays tax at a rate of 35 % and theopportunity cost of capital is 15 %​, what is the net present valueof the decision to produce the chains​ in-house instead ofpurchasing them from the​ supplier?
Project the annual free cash flows ​(FCF​) of buying thechains.
The annual free cash flows for years 1 to 10 of buying the chainsis ​$ ____________. ​ (Round to the nearest dollar. Enter a freecash outflow as a negative​ number.)
Compute the NPV of buying the chains from the FCF. The NPV ofbuying the chains from the FCF is ​$ ________. ​(Round to thenearest dollar. Enter a negative NPV as a negative​ number.)
Compute the initial FCF of producing the chains. The initial FCF ofproducing the chains is ​$ ___________. ​(Round to the nearestdollar. Enter a free cash outflow as a negative​ number.)
Compute the FCF in years 1 through 9 of producing the chains. TheFCF in years 1 through 9 of producing the chains is ​$ _____.​(Round to the nearest dollar. Enter a free cash outflow as anegative​ number.)
Compute the FCF in year 10 of producing the chains. The FCF in year10 of producing the chains is ​$ ______. ​(Round to the nearestdollar. Enter a free cash outflow as a negative​ number.)
Compute the NPV of producing the chains from the FCF. The NPV ofproducing the chains from the FCF is ​$ ______. ​ (Round to thenearest dollar. Enter a negative NPV as a negative​ number.)
Compute the difference between the net present values found above.The net present value of producing the chains​ in-house instead ofpurchasing them from the supplier is ​$__________. ​ (Round to thenearest​ dollar.)
