Manufacturing cans in-house to achieve cost savings

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Reference no: EM131890436

• You are a financial manager at a soft-drink company. Until today the company bought empty cans from an outside supplier for $0.22/can. You are considering whether to begin manufacturing cans in-house to achieve cost savings.

• The cost of purchasing a can machine is $850,000 and the lifespan of the machine is 10 years. At the end of 10 years, the company expects to sell the machine for $160,000. Assume the machine is depreciated on a straight-line basis to zero.

• The cost of producing a can using the in-house machine is $0.17.

• The machine would be purchased at year 0, and all subsequent cash flows occur in year 1-10.

• Assume the discount rate is 10% and the corporate tax rate is 36%. Also assume that the project does not require an investment in Net Working Capital.

• Assume that the company will produce and sell 3 million cans annually. Determine the NPV of moving to in-house production relative to the current situation. Should you accept or reject the project?

Reference no: EM131890436

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