Supplier offers to supply component at an annual payment

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Reference no: EM131014921

Betty's Home Décor is considering whether to produce a component in-house or whether to purchase it from a supplier. A supplier offers to supply the component at an annual payment of $120,000 over three years (payable at the beginning of years 2, 3, and 4, respectively). On the other hand, Betty's Home Décor can make the component in-house. Betty's Home Décor would have to invest $160,000 in depreciable assets and it will take one year to bring the asset into production because of extensive work required (so the investment must be made at the beginning of year 1). After the initial investment, annual production costs are estimated to be $ 75,000 over three years (payable at the beginning of years 2, 3, and 4, respectively). The following assumptions are made (this information may or may not be of use): ? Depreciation assessed at the end of years 2, 3, and 4, respectively; assets have a liquidation value of $ 50,000 at the end of year 4 ? Interest rate: 14% ? Tax rate: 35% Draw a timeline for the make and one for the buy decision and include ALL cash outflows and inflows. Then compute the net present value (NPV) of these flows.

Reference no: EM131014921

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