Reference no: EM132504250

A smartphone manufacturer has two options to acquire electronic component for existing products Option one: pay a sub-contractor $500,000 (before tax) a year. Option two: produce the component by itself. If the firm chooses to produce, the production cost would be $300,000 a year, and the machine will cost $150,000. Also a working capital of $20,000 is required. The working capital will be recovered when the production ends. Assume the production will last for four years. The machine can be depreciated by using a four-year straight line depreciation method or by using three-year MACRS method. The three-year MACRS method has the corresponding annual depreciation rate of 33.33%, 44.45%, 14.81% and 7.41% for the first four years. The machine has no resale value after four years. If the tax rate is 35% and the cost of capital is 15%. Assume all operating cash flows occur at the end of the year.