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5. A bicycle manufacturer currently produces 300,000 units a year and expects output leve future. It buys chains from an outside supplier at a price
5. A bicycle manufacturer currently produces 300,000 units a year and expects output leve future. It buys chains from an outside supplier at a price o cheaper to make these chains rather than buy them. Direct in-house production $1.50 per chain. The necessary machinery would cost $250,000 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 additional working capital of $50,000 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 $20,000. The company pays tax at a rate of 35% and the opportunity cost of capital is 15%, f $2 a chain. The plant manager believes that it would be costs are estimated to be only a. b. c. What is the NPV of purchasing the chains from the outside supplier? [10 points] What is the NPV of producing the chains in-house? (25 points) What is the NPV of the decision to produce the chains in-house instead of purchasing them from the outside supplier? [5 points]
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