# Question: A bicycle manufacturer currently produces 300 000 units a year and

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 since 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?

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?

## Relevant Questions

Your firm is considering a project that would require purchasing $7.5 million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the firm's tax rate is 40%, ...Using the FCF projections in part (b) of Problem 11, calculate the NPV of the HomeNet project assuming a cost of capital ofa. 10%.b. 12%.c. 14%.What is the IRR of the project in this case?IDX Technologies is a privately held developer of advanced security systems based in Chicago. As part of your business development strategy, in late 2008 you initiate discussions with IDX’s founder about the possibility of ...The following table shows the one-year return distribution of Startup, Inc. Calculatea. The expected return.b. The standard deviation of thereturn.Download the spreadsheet from MyFinanceLab containing the data for Figure 10.1.a. Compute the average return for each of the assets from 1929 to 1940 (The Great Depression).b. Compute the variance and standard deviation for ...Post your question