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A widget manufacturer currently produces 2 0 0 , 0 0 0 units a year. It buys widget lids from an outside supplier at a
A widget manufacturer currently produces units a year. It buys widget lids from an
outside supplier at a price of $ a lid. The plant manager believes that it would be cheaper
to make these lids rather than buy them. Direct production costs are estimated to be only
$ a lid. The necessary machinery would cost $ and would last years. This
investment could be written off for tax purposes using the sevenyear tax depreciation
schedule. The plant manager estimates that the operation would require additional work
ing capital of $ but argues that this sum can be ignored since it is recoverable at the
end of the years. If the company pays tax at a rate of and the opportunity cost of
capital is would you support the plant managers proposal? State clearly any addi
tional assumptions that you need to make.
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