A bicycle manufacturer currently produces352,000units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of$2.10a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Directin-house production costs are estimated to be only $ 1.50 per chain. The necessary machinery would cost$210,000and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using aten-year straight-line depreciation schedule. The plant manager estimates that the operation would require$58,000of 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$15,750.<\/p>
If the company pays tax at a rate of 35 % and the opportunity cost of capital is 15 %, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?<\/p>
<\/p>
Cash required for producing = 352000 units * $1.5 =$528000 + Dep. $21000 = $549000 - $192150(Tax savings 35%) = $356850 - $21000 (Dep.) = $335,850<\/p>
<\/p>
What is the FCF for year 10?<\/p>", "transcribed_text": "", "related_book": { "title": "Managerial Accounting", "isbn": "978-0073526706, 9780073526706", "edition": "12th Edition", "authors": "Ray H. Garrison, Eric W. Noreen, Peter C. Brewer", "cover_image": "https:\/\/dsd5zvtm8ll6.cloudfront.net\/si.question.images\/book_images\/104.jpg", "uri": "\/textbooks\/managerial-accounting-12th-edition-9780073526706", "see_more_uri": "" }, "free_related_book": { "isbn": "B0CP56YS5V", "uri": "\/textbooks\/small-business-taxes-made-easy-the-updated-guide-to-avoid-irs-penalties-maximize-tax-deductions-and-increase-your-net-profit-llc-formation-guide-1st-edition-979-8870199672-321719", "name": "Small Business Taxes Made Easy The Updated Guide To Avoid Irs Penalties Maximize Tax Deductions And Increase Your Net Profit + Llc Formation Guide", "edition": "1st Edition" }, "question_posted": "2024-06-06 04:00:49", "see_more_questions_link": "\/study-help\/questions\/business-management-leadership-2023-June-05", "step_by_step_answer": "The Answer is in the image, click to view ...", "students_also_viewed": [ { "url": "\/a-random-sample-of-voters-in-nashville-tennessee-is-classified", "description": "A random sample of voters in Nashville, Tennessee, is classified by age group, as shown by the following data. 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