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A bicycle manufacturer currently produces 3 0 0 , 0 0 0 units per year and expects output levels to remain steady in the future.

A bicycle manufacturer currently produces 300,000 units per year and expects output levels to remain steady in the future. It buys one chain per unit from an outside supplier at the price of $2 per 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 $1.50 per chain. The necessary equipment would cost $250,000 and would be obsolete after 10 years. The 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 $50,000 of inventory and other working capital up front. This inventory and other working capital can be sold at the end of the 10 years for $50,000. Expected proceeds from scrapping the machinery after 10 years are $20,000. The companys marginal tax rate is 35%, the appropriate discount rate for all cashflows associated with the above investment is 15%, and the project will be 100% equity financed. 2 What is the NPV of the decision to produce the chains in-house instead of purchasing them from a supplier? Assume that the capital expenditure and working capital investment would occur immediately, and all other cashflows occur at the end of the relevant year

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