Project NPV

$($

S

$6$

$.$

$3$

$)$

$$A widget manufacturer currently produces

$2$

$0$

$0$

$,$

$0$

$0$

$0$

$$units a year. It buys

widget lids from an outside supplier 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 are

estimated to be only $

$1$

$.$

$5$

$0$

$$a lid. The necessary machinery would cost $

$1$

$5$

$0$

$,$

$0$

$0$

$0$

$$and would

last

$1$

$0$

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

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

$3$

$0$

$,$

$0$

$0$

$0$

but argues that this sum can be ignored since it is recoverable at the end of the

$1$

$0$

$$years$.$ If

the company pays tax at a rate of

$2$

$1$

$\%$

$$and the opportunity cost of capital is

$1$

$5$

$\%$

$,$

$$would youProject NPV

$($

S

$6$

$.$

$3$

$)$

$$A widget manufacturer currently produces

$2$

$0$

$0$

$,$

$0$

$0$

$0$

$$units a year. It buys

widget lids from an outside supplier 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 are

estimated to be only $

$1$

$.$

$5$

$0$

$$a lid. The necessary machinery would cost $

$1$

$5$

$0$

$,$

$0$

$0$

$0$

$$and would

last

$1$

$0$

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

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

$3$

$0$

$,$

$0$

$0$

$0$

but argues that this sum can be ignored since it is recoverable at the end of the

$1$

$0$

$$years$.$ If

the company pays tax at a rate of

$2$

$1$

$\%$

$$and the opportunity cost of capital is

$1$

$5$

$\%$

$,$

$$would you

support the plant manager's proposal? State clearly any additional assum

support the plant manager's proposal? State clearly any additional assum