$1\mathrm{.}6$

A bicycle manufacturer currently produces $351,000$ units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $$1\mathrm{.}80$ a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in$-$house production costs are estimated to be only $$1\mathrm{.}60$ per chain. The necessary machinery would cost $$280,000$ and would be obsolete after $10$ years. This investment could be depreciated to zero for tax purposes using a $10-$year straight$-$line depreciation schedule. The plant manager estimates that the operation would require $$57,000$ of inventory and other working capital upfront $($year $0),$ but argues that this sum can be ignored since it is recoverable at the end of the $10$ years. Expected proceeds from scrapping the machinery after $10$ years are $$21,000.$ If the company pays tax at a rate of $25\%$ and the opportunity cost of capital is $16\%,$ what is the net present value of the decision to produce the chains in$-$house instead of purchasing them from the supplier?

First, we project the annual free cash flows of buying the chains and then compute the project's NPV$.$

The annual free cash flows for years $1$ to $10$ of buying the chains is $ $($Round to the nearest dollar. Enter a free cash outflow as a negative number.$)$

The NPV of buying the chains is $ $($Round to the nearest dollar. Enter a negative NPV as a negative number.$)$

Next, we project the annual free cash flows of producing the chains and then compute the project's NPV$.$

The initial FCF of producing the chains is $ $($Round to the nearest dollar. Enter a free cash outflow as a negative number.$)$

The FCF in years $1$ through $9$ of producing the chains is $($Round to the nearest dollar. Enter a free cash outflow as a negative number.$)$

The FCF in year $10$ of producing the chains is $\{($Round to the nearest dollar. Enter a free cash outflow as a negative number.$)$

The NPV of producing the chains is $ $($Round to the nearest dollar. Enter a negative NPV as a negative number.$)$

Then, we compute the difference between the net present values found above.

The net present value of producing the chains in$-$house instead of purchasing them from the supplier is $ $($Round to the nearest dollar.$)$