Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A bicycle manufacturer currently produces 2 1 5 , 0 0 0 units a year and expects output levels to remain steady in the future,
A bicycle manufacturer currently produces units a year and expects output levels to remain steady in the future, It buys chain 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 $ and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a tenyear straightline depreciation schedule. The plant manager estimates that the operation would require $ of inventory and other working capital upfront year 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 $
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?
Project the annual free cash flows FCF of buying the chains.
The annual free cash flows for years to of buying the chains is $ Round to the nearest dollar. Enter a free cash outflow as a negative number.
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