An equipment manufacturer currently produces 50,000 units a year. It buys a part for the equipment from an outside supplier at a price of $1.40 a unit. The company is thinking of producing the part by itself which is likely to cost only 1.10 per unit. The investment required in year 0 for machinery is $75,000 (which will be obsolete after 5 years) and for working capital is $20,000 (which will be recovered at the end of 5 years). The investment in machinery would be depreciated to zero for tax purposes using a 5-year straight-line depreciation schedule. Expected proceeds from scrapping the machinery after 5 years are $15,000.

         If the company pays tax at a rate of 35% and the opportunity cost of capital is 12%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

Answer rating: 100% (QA)

To calculate the net present value NPV of the decision to produce the chains inhouse instead of purc... View the full answer