Reference no: EM131908939
A bicycle manufacturer currently produces 336,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $ 1.90 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 $ 1.60 per chain. The necessary machinery would cost $290,000 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 $39,000 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 $21,750.
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.)
Why should eastside buy the component
: Should Eastside buy the component if it cannot otherwise use the released capacity? Present your answer in the form of differential analysis.
|
What should the standing order quantity be for steak
: The Kirei-Hana Japanese Steak House in San Francisco consumes 3,000 pounds of sirloin steak per month. Yama Hirai, the new restaurant manager.
|
Discuss the process manufacturing settings
: Lean principles have been popular in manufacturing especially of which products are discrete. Do you think lean principles are also applicable in process.
|
Find the price to yield convertible semi-annually
: A 20-year, $4000 par value bond has 8% semiannual coupons and matures at par. Find the price to yield 6% convertible semi-annually.
|
Project the annual free cash flows of producing the chains
: Project the annual free cash flows (FCF) of buying the chains. Compute the initial FCF of producing the chains.
|
What are some secondary sources of information
: Searching for Research Suppose your university or college wants to modify its course scheduling procedures to better serve students.
|
Prepare an statement of changes in stockholders equity
: Prepare an income statement, statement of changes in stockholders' equity, and a balance sheet dated December 31, 2016, for Majka Company.
|
What are your thoughts on black friday
: Early trends suggest that shoppers are responding to eBay's efforts as well. As eBay has continued to develop the offerings of the eBay Fashion app.
|
Find the npv and calculate the payback period
: Suppose you are given a different and mutually exclusive investment opportunity, one that requires the same initial investment of $40,000, but is estimated.
|