This paper circulates around the core theme of what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier? together with its essential aspects. It has been reviewed and purchased by the majority of students thus, this paper is rated 4.8 out of 5 points by the students. In addition to this, the price of this paper commences from £ 99. To get this paper written from the scratch, order this assignment now. 100% confidential, 100% plagiarism-free.
A bicycle manufacturer currently produces
300,000 units a year and expects output levels to remain steady in the future.
It buys chains from an outside supplier at a price of $2 a chain. The plant
manager believes that it would be cheaper to make these chains rather than buy
them. Direct in-house production costs are estimated to be only $1.50 per
chain. The necessary machinery would cost $250,000 and would be obsolete after
10 years. This investment could be depreciated to zero for tax purposes using a
10-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 because it is
recoverable at the end of the 10 years. Expected proceeds from scrapping the
machinery after 10 years are $20,000.
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 the chains in-house instead of purchasing them from the
supplier?
