Industrial Electric plc estimates its needs for a component used in its products at 7,000 units per
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Industrial Electric plc estimates its needs for a component used in its products at 7,000 units per year for the next 10 years. A subcontractor offers to supply the parts at €5 per unit.
Industrial Electric can make the part in its own workshops for €3 per unit, if it buys a new machine. A new machine would cost €78,000, have a useful life of 10 years and a residual value of nil. The company generally gets a 10% return (after tax) on its capital expenditure. It depreciates machinery on a straight-line basis and tax is levied at a rate of 25%.
Should the company accept the subcontractor's offer?
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Related Book For 
Corporate Finance Theory And Practice
ISBN: 9781119841623
6th Edition
Authors: Pascal Quiry, Yann Le Fur, Pierre Vernimmen
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