Reference no: EM131815611
A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $ 2.00 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 $ 1.50 per chain. The necessary machinery would cost $250,000 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 $50,000 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 $20,000. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?
Project the annual free cash flows (FCF) of buying the chains. The annual free cash flows for years 1 to 10 of buying the chains is (Round to the nearest dollar. Enter a free cash outflow as a negative number.)
Compute the NPV of buying the chains from the FCF. The NPV of buying the chains from the FCF is (Round to the nearest dollar. Enter a negative NPV as a negative number.)
Compute the initial FCF of producing the chains. The initial FCF of producing the chains is (Round to the nearest dollar. Enter a free cash outflow as a negative number.)
Compute the FCF in years 1 through 9 of producing the chains. The FCF in years 1 through 9 of producing the chains is (Round to the nearest dollar. Enter a free cash outflow as a negative number.)
Compute the FCF in year 10 of producing the chains. The FCF in year 10 of producing the chains is (Round to the nearest dollar. Enter a free cash outflow as a negative number.)
Compute the NPV of producing the chains from the FCF. The NPV of producing the chains from the FCF is (Round to the nearest dollar. Enter a negative NPV as a negative number.)
Compute the difference between the net present values found above. The net present value of producing the chains in-house instead of purchasing them from the supplier is
(Round to the nearest dollar.)
|
Typical decision making process from reflection
: What can you conclude about your typical decision making process from this reflection?
|
|
Compute the net income of the company
: Penno Corporation recorded service revenues of $200,000 in 2013, of which $170,000 were on credit and $30,000 were for cash. Moreover, of the $170,000.
|
|
Compute total manufacturing overhead costs
: The company has been using a traditional, fairly simplistic way of allocating (applying) its total manufacturing overhead costs
|
|
Describe the informal structure of the organization
: Describe the informal structure of the organization. How does work actually get done? How does the organization deal with the differentiation-integration issue?
|
|
Project the annual free cash flows of buying the chains
: Project the annual free cash flows (FCF) of buying the chains. Compute the NPV of buying the chains from the FCF.
|
|
What is the amount of income or loss
: Activity B had income of 30,000 what is the amount of income or loss recognized in 2011 from these activities
|
|
Writing skills so important to organizational factors
: Why are managerial writing skills so important to organizational factors such as morale, culture, motivation, and collaboration?
|
|
How can you use clinical significance to support
: Define Clinical Significance, and Explain the difference between Clinical and Statistical Significance.
|
|
Analyzing transactions to compute net income
: Wasley Corp., a start-up company, provided services that were acceptable to its customers and billed those customers for $350,000 in 2012.
|