Industrial Electric plc estimates its needs for a component used in its products at 7000 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 35%.

Should the company accept the subcontractor’s offer?