Part One

Value

Project NPV $($S$6\mathrm{.}3)$ A widget manufacturer currently produces $200,000$ units a year. li hays

widget lids from an outside supplice at a price of $$2$ a lid. The plant manager believes that

it would be cheaper to make these lids rather than buy them. Direct production costs ate

estimated to be only $$1\mathrm{.}50$ a lid. The necessary machinery would cost $$150,000$ and would

last $10$ years. This investment could be written off immediately for tax purposes. The plant

manager estimates that the operation would require additional working capital of $$30,000$

but argues that this sum can be ignored since it is recoverable at the end of the $10$ years. If

the company pays tax at a rate of $21\%$ and the opportunity cost of capital is $15\%,$ would you

support the plant manager's proposal? State clearly any additional assumptions that you need

to make.