Would you support the plant manager proposal

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Reference no: EM131987522

A widget manufacturer currently produces 200,000 units a year. It buys widget lids from outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper 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 can be depreciated using 7-year MACRS schedule. This machine is expected to be operated for a 10 year period. The plant manager estimates that the operations 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 the rate of 35 percent and the opportunity cost of capital is 15 percent, would you support the plant manager's proposal? State clearly any additional assumptions that you need to make.

Reference no: EM131987522

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