Question
a. You work for Widget, Inc., the worlds largest manufacturer/distributor of widgets. You are analyzing a new line of specialty widgets and trying to determine
a. You work for Widget, Inc., the worlds largest manufacturer/distributor of widgets. You are analyzing a new line of specialty widgets and trying to determine whether the company should purchase the specialty widgets from a supplier or manufacture them internally.
This will be a 3 year project. Unit sales are expected to be 100 widgets per year for each of the next 3 years.
If Widget, Inc. manufactures the widgets, the widgets will cost $50 each to produce. However, going this direction will require an immediate investment of $100,000 for the appropriate machinery, and an immediate investment of $10,000 in net working capital. The machinery is expected to have a salvage value (i.e., will be sold) for $20,000 at the end of the project, and will be depreciated on the straightline basis.
Widget, Inc.s tax rate is 35%. ACME leadership considers this project to be of average risk compared to other company projects. The company's WACC is 10%, and the target capital structure will be maintained/held constant for the life of this project.
a. What is the PV of the cost to manufacture the widgets?
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