A bicycle manufacturer currently produces

$212$ comma $000212,000$

units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of

$ $2\mathrm{.}20$$$2\mathrm{.}20$

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{.}40$$$1\mathrm{.}40$

per chain. The necessary machinery would cost

$ $297$ comma $000$$$297,000$

and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a$$ ten$-$year straight$-$line depreciation schedule. The plant manager estimates that the operation would require

$ $40$ comma $000$$$40,000$

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 ten years. Expected proceeds from scrapping the machinery after ten years are

$ $22$ comma $275$$$22,275.$

If the company pays tax at a rate of

$20\%20\%$

and the opportunity cost of capital is

$15\%15\%,$

what is the net present value of the decision to produce the chains$$ in$-$house instead of purchasing them from the$$ supplier?

Question content area bottom

Part $1$

Project the annual free cash flows

$($FCF$)$

of buying the chains.

$($a$)$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.$)$

$($b$)$compute the NPV of buying the chains from FCF$.$

$($c$)$ Compute the initial FCF of producing the chains.

$($d$)$Compute the FCF in years from $1$ through $9$ of producing the chains.

$($e$)$ Compute the FCF in year $10$of producing the chains

$($f$)$ Compute the NPV of producing the chainsfrom the FCF

$($G$)$ Compute the difference between the NPV found above