What would the npv of buying the chains from an outside

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Reference no: EM133442670

Case Study: 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 $4.50 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 $3.00 per chain. The necessary machinery would cost $325,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposes using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require $65,000 of inventory and other working capital upfront (year 0), but argues that this sum can be ignored because it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $30,000. The company pays tax at a rate of 25% and the opportunity cost of capital is 12%.

Questions:

If the firm buys the chain from an outside supplier, the fcf in 1 year would be what?

What would the npv of buying the chains from an outside supplier be?

If the firm chooses in-house, the fcf in year 0 would be what? What about year 1? Year 10?

Reference no: EM133442670

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