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A scooter manufacturer will produce 500,000 scooters a year, forever. The manufacturer buys handlebars from a supplier for $12.00 a handlebar. If the manufacturer produces them in-house, they will cost $8.00 per handlebar. To produce the handlebars, the manufacturer will need to purchase a machine for $450,000. The machine will be obsolete after ten years. Thus, the machine could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $50,000 of inventory and other working capital upfront (year 0), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $18,000. The company tax rate is 28%. The firm's WACC is 12%.

What is the NPV of continuing to purchase the handlebars for the next 10 years? Pick the closest value.

-$16,681,000

-$25,324,000

-$29,968,000

-$24,408,000

What would be the impact on free cash flows to the firm in year 0 if the manufacturer decided to produce their own handlebars? Pick the closest value.

-$350,000

-$440,000

-$650,000

-$500,000

What would be the impact on free cash flows to the firm in year 1 if the manufacturer decided to produce their own handlebars? Pick the closest value.

-$2,804,000

-$4,407,000

-$2,867,000

-$4,353,000

What would be the impact on free cash flows to the firm in year 10 if the manufacturer decided to produce their own handlebars? Pick the closest value.

-$2,867,000

-$2,804,000

-$4,407,000

-$4,353,000

What is the NPV of producing the handlebars in-house? Pick the closest value.

-$16,681,000

-$29,968,000

-$24,408,000

-$25,324,000

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