Assignment Document

Make or buy decision

Pages:

Preview:


  • "QUESTION: ANSWER:We will calculate incremental NPV value for Make vs Buy decision:Steps:(1) Cost of the equipment = $945,000 less 2%discount - $1,500 (sale value of oldequipment) + $11,000 (freight) + $22,900 (installation) = $958,500(2) Depreciatio..

Preview Container:


  • "QUESTION: ANSWER:We will calculate incremental NPV value for Make vs Buy decision:Steps:(1) Cost of the equipment = $945,000 less 2%discount - $1,500 (sale value of oldequipment) + $11,000 (freight) + $22,900 (installation) = $958,500(2) Depreciation and Tax shield: 3 year property class, Initial Investment value$958,500Tax shield @ DCF @Year Rate Depreciation 30% 14% PW1 33.33% $319,468 $95,840 0.8772 $84,0712 44.45% $426,053 $127,816 0.7695 $98,3503 14.81% $141,954 $42,586 0.6750 $28,7444 7.41% $71,025 $21,307 0.5921 $12,616100.00% $958,500 $287,550 $223,781 (3) Salvage value $15,000 at the end of 5th year PW = $15,000 * 0.5194(P/F,14%,5yr) = $7,791 and tax shield lost on PV of salvage value @30% = $2,337. Netcash inflow = $5,454(4a) Working capital requirement at year 0 = -$20,000(4b) Working capital recovery at the end of 5th year, PW = $20,000 * 0.5194(P/F,14%,5yr) = $10,387 (5) Savings in Manufacturing cost:Direct labor 50% of $8 $4Variable overhead 50% of $6 $3Direct Material 30% of $10 ($3)Net savings $4DCFNet @Year Demand Savings Savings 14% PW1 50,000 $4 $200,000 0.877 $175,4392 50,000 $4 $200,000 0.769 $153,8943 52,000 $4 $208,000 0.675 $140,3944 55,000 $4 $220,000 0.592 $130,2585 55,000 $4 $220,000 0.519 $114,261Total $714,245 (6) Additional supervisory cost by not purchasing from outside: PW = -$45,000 *3.433 (P/A,14%,5yr) = $154,489 and tax shield lost on PW @30% = $46,347. Net cashsavings = -$108,142(7) Now, we will sum all the Present Value's from point (1) to (6)= -$958,500 + $223,781 + $5,454 - $20,000 + $10,487 + $714,245 - $108,142 = - $24,533 (Negative)Decision: Recommend to accept the outside manufacturer's offer, as theincremental NPV to make the waste container inhouse is negative "

Related Documents

Start searching more documents, lectures and notes - A complete study guide!
More than 25,19,89,788+ documents are uploaded!

Why US?

Because we aim to spread high-quality education or digital products, thus our services are used worldwide.
Few Reasons to Build Trust with Students.

128+

Countries

24x7

Hours of Working

89.2 %

Customer Retention

9521+

Experts Team

7+

Years of Business

9,67,789 +

Solved Problems

Search Solved Classroom Assignments & Textbook Solutions

A huge collection of quality study resources. More than 18,98,789 solved problems, classroom assignments, textbooks solutions.

Scroll to Top