A widget manufacturer currently produces 200,000 units a year. It buys widget lids from an outside supplier at a price of $2 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 $1.50 a lid. The necessary machinery would cost $200,000 and would last 10 years. This investment could be written off immediately for tax purposes. The plant manager estimates that the operation would require additional working capital of $30,000 but argues that this sum can be ignored since it is recoverable at the end of the 10 years. Question: If the company pays tax at a rate of 21% and the opportunity cost of capital is 8%, would you support the plant managers proposal?

Multiple Choice Yes, I will support the proposal because it will cost 1,324,000 to produce but 1,059,000 to buy Yes, I will support the proposal because it will cost 1,324,000 to produce but 1,586,000 to buy Yes, I will support the proposal because it will cost 921,000 to produce but 1,059,000 to buy Yes, I will support the proposal because it will cost 1,764,393 to produce but 2,120,386 to buy