Widget manufacturer currently produces

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Reference no: EM13848412

A widget manufacturer currently produces 200,000 units per year. It buys widget lids from an outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper to make these lids rather than buy them. Direct production costs are estimated to be only $1.50 a lid. The necessary machinery would cost $150,000 and last 10 years. This investment could be written off for tax purposes using the seven-year tax depreciation schedule. The plant manager estimates that the operation would require additional working capital of $30,000 but argues that this sum can be ignored since it is recoverable at the end of 10 years. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, would you support the plant managers proposal. State your assumptions that you need to make.

Reference no: EM13848412

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