An ecuioment manufacturer curently produces 50.000 uits a vear:It burs a pat for the eouipment from an outside surplier at a price of $1.40 a unit. The compary is thinking of producine the part by itseff which is likely to costonly 1.10 per unit. The avestment required in year O for machinery is $75,.000 (which will be obsolete ater S rears) and for working capital is $20.000 (which wilbe recorered at the end of 5 vears). The inrvestment n machinery would be depreciated to zero for tax purposes using a 5-year straight-lme 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)

SOLUTION Calculation Depreciation calculation Machinery Value 75000 Life 5 years Straight line metho... View the full answer