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Betty's Home Decor is considering whether to produce a component in-house or whether to purchase it from a supplier. A supplier offers to supply the
Betty's Home Decor is considering whether to produce a component in-house or whether to purchase it from a supplier. A supplier offers to supply the component at an annual payment of exist120,000 over three years (payable at the beginning of years 1, 2, and 3, respectively). On the other hand, Betty's Home Decor can make the component in-house. Betty's Home Decor would have to invest exist160,000 in depreciable assets and it will take one year to bring the asset into production because of extensive work required (so the investment must be made at the beginning of year 0). After the initial investment, annual production costs are estimated to be exist75,000 over three years (payable at the beginning of years 1, 2, and 3, respectively). The following assumptions are made (this information may or may not be of use): Depreciation assessed at the end of years 1, 2, and 3, respectively, assets have a liquidation value of exist50,000 at the end of year 3 Interest rate: 14% Tax rate: 35% Draw a timeline for the make and one for the buy decision and include ALL cash outflows and inflows. Then compute the net present value (NPV) of these flows. Then complete the table below. IMPORTANT When calculating, make sure to round each calculation to the closest whole number and use that number in all your calculations! Enter commas as needed (###, ### or #, ###)
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