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A bicycle manufacturer currently produces 308 comma 000 units a year and expects output levels to remain...

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Finance

A bicycle manufacturer currently produces

308 comma 000

units a year and expects output levels to remain steady in thefuture. It buys chains 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

$ 1.40

per chain. The necessary machinery would cost

$ 279 comma 000

and would be obsolete after ten years. This investment could bedepreciated to zero for tax purposes using a​ ten-yearstraight-line depreciation schedule. The plant manager estimatesthat the operation would require

$ 45 comma 000

of inventory and other working capital upfront​ (year 0), butargues that this sum can be ignored since it is recoverable at theend of the ten years. Expected proceeds from scrapping themachinery after ten years are

$ 20 comma 925

.

If the company pays tax at a rate of

35 %

and the opportunity cost of capital is

15 %

​,

what is the net present value of the decision to produce thechains​ in-house instead of purchasing them from the​ supplier?

Answer & Explanation Solved by verified expert
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