The managing director of Curt plc is irritated that the supplier for the component widgets has recently

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Question:

The managing director of Curt plc is irritated that the supplier for the component widgets has recently increased prices by another 10 per cent following similar rises for each of the last five years. Based on the assumption that this

pattern will continue, the cost of these widgets will be:

The managing director is convinced that the expertise for the manufacture of widgets exists within Curt. He therefore

proposes the purchase of the necessary machine tools and other items of equipment to produce widgets in-house, at a

cost of £70,000. The net cash outflows associated with this course of action are:

Note: The figures include the £70,000 for equipment and operating costs, etc.

The machinery has a life of five years and can be sold for scrap at the end of its life for £10,000. This is not included in the £88,000 for year 5. The installation of the new machine will require the attention of the technical services manager during the first year. She will have to abandon other projects as a result, causing a loss of net income of £48,000 from those projects. This cost has not been included in the above figures. The relevant discount rate is 16 per cent, and all cash flows occur at year ends except the initial investment. Help Curt plc to decide whether to produce widgets for itself. What other factors might influence this decision?