A manufacturing company produces 490095 motors per year. The output is expected to remain steady...
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A manufacturing company produces 490095 motors per year. The output is expected to remain steady in the future. Outside supplies to finish the product are $2.5 each. Inhouse production are estimated to be only $1.6. However, the required machinery would cost $795268 and would ned to be replaced in 9 years. This machine is depreciated to zero with 9year straight line depreciation for tax purposes. The management expects that the operation would require additional working capital of $30475 but argues that this sum can be ignored since it is recoverable at the end of the 9 years. The tax rate is at 21%. the risk-free rate is 10% and the opportunity cost of capital is 16%.
A) What is the incremental cash flow the firm will incur in year 4 if they elect to manufacture supplies on their own?
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