You are an analyst for a pipe manufacturing corporation that isconsidering a new project which involves fabricating some custompipe for a single customer. The project will take advantage ofexcess capacity in an existing plant. The plant has the capacity toproduce 50,000 units of 18-inch pipe, but only 25,000 are beingproduced currently. Sales of 18-inch pipe are expected to increaseby 10% a year. You want to use some of the remaining capacity tomanufacture 20,000 units of custom 19.5-inch pipe for the next tenyears (which will use up 40% of the total capacity), your customerwill purchase this amount for the next ten years (no growth). Anaverage unit of 18-inch pipe sells for $100 and costs $40 to make.The tax rate for the corporation is 40% and the discount rate is10%. Is there an opportunity cost involved for producing the custompipe? If so, how much is it?
