Reference no: EM133207217

Bravo Company manufactures several lines of machine products. One unique part, a valve stem, requires specialized maintenance tools that need to be replaced. Management has decided that the only alternative to replacing these tools is to acquire the valve stem from an outside source. A supplier is willing to provide the valve stem at a unit sales price of $20 if at least 70,000 units are ordered annually.

Bravo 's average use of valve stems over the past three years has been 80,000 units per year. This volume is expected to remain constant over the next five years. Cost records indicate that unit manufacturing costs for the last several years have been as follows:

Direct materials $3.80

Direct labour 3.70

Variable overhead1.70

Fixed overhead1 4.50

Total unit cost$ 13.70

Amortization accounts for two-thirds of the fixed overhead. The balance is for other fixed overhead costs of the factory that require cash expenditures. All fixed overhead will continue to incur, even if the part is bought on the outside.

If the specialized tools are purchased, they will cost $2.5 million and have a disposal value of $100,000 after their expected economic life of five years. Straight line amortization is used for book purposes, but capital cost allowance is used for tax purposes. The specialized tools are considered Class 10 and maximum

CCA available is 30% per annum, declining balance method. The company requires a 12% return on investment

a. Use the NPVmethod to determine whether Bravo Company should replace the old tools or purchase the valve stem from an outside supplier.