Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A bicycle manufacturer currently produces 2 0 2 comma 0 0 0 units a year and expects output levels to remain steady in the future.
A bicycle manufacturer currently produces comma units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $ a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct inhouse production costs are estimated to be only $ per chain. The necessary machinery would cost $ comma and would be obsolete after years. This investment could be depreciated to zero for tax purposes using a year straightline depreciation schedule. The plant manager estimates that the operation would require $ comma of inventory and other working capital upfrontyear but argues that this sum can be ignored since it is recoverable at the end of the years. Expected proceeds from scrapping the machinery after years are $ comma If the company pays tax at a rate of and the opportunity cost of capital is what is the net present value of the decision to produce the chains inhouse instead of purchasing them from the supplier?
Question content area bottom
Part
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 to of buying the chains is $
negative Round to the nearest dollar. Enter a free cash outflow as a negative number.
Part
The NPV of buying the chains is $
negative Round to the nearest dollar. Enter a negative NPV as a negative number.
Part
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 $
negative Round to the nearest dollar. Enter a free cash outflow as a negative number.
Part
The FCF in years through of producing the chains is $
negative Round to the nearest dollar. Enter a free cash outflow as a negative number.
Part
The FCF in year of producing the chains is $
negative Round to the nearest dollar. Enter a free cash outflow as a negative number.
Part
The NPV of producing the chains is $
enter your response here. Round to the nearest dollar. Enter a negative NPV as a negative number.
I just need help with part
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started