Reference no: EM133168190

Question - A bicycle manufacturer currently produces units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of a 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 per chain. The necessary machinery would cost and 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 of inventory and other working capital upfront (year 0), but 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 . 320,000 $2.20 $1.60 $265,000 $52,000 $19,875 If the company pays tax at a rate of and the opportunity cost of capital is, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

Compute the FCF in years 1 through 9 of producing the chains. In years 1 to 9 there are no capital expenditures or change in net working capital.