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A bicycle manufacturer currently produces258 comma 000258000units a year and expects output levels to remain steady in the future It buys chains from an outside supplier at a price of

A bicycle manufacturer currently produces258 comma 000258,000units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of$ 1.90$1.90a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct? in-house production costs are estimated to be only$ 1.50$1.50per chain. The necessary machinery would cost$ 221 comma 000$221,000and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a? ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require additional working capital of$ 23 comma 000$23,000but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are$ 16 comma 575$16,575.If the company pays tax at a rate of35 %35%and the opportunity cost of capital is15 %15%?,what is the net present value of the decision to produce the chains? in-house instead of purchasing them from the? supplier?Project the annual free cash flows FCF of buying the chains. The annual free cash flows for years 1-10 of buying the chains is $___ ?

 

May 31 2020 View more View Less

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