A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain...
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A bicycle manufacturer currently produces units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $ a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct inhouse production costs are estimated to be only $ per chain. The necessary machinery would cost $ and would be obsolete after years. This investment could be depreciated to zero for tax purposes using a year straightline depreciation schedule. The plant manager estimates that the operation would require $ of inventory and other working capital upfront year but argues that this sum can be ignored since it is recoverable at the end of the years. Expected proceeds from scrapping the machinery after years are $ If the company pays tax at a rate of and the opportunity cost of capital is what is the net present value of the decision to produce the chains inhouse instead of purchasing them from the supplier?
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