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Community Challenges, a nonprofit organization for physically and mentally challenged people, manufactures a variety of products in four plants located in Eastern Ontario. The company

Community Challenges, a nonprofit organization for physically and mentally challenged

people, manufactures a variety of products in four plants located in Eastern Ontario. The

company is currently purchasing an electronic igniter from an outside supplier for $62

per unit. Because of supplier reliability problems, the company is considering producing

the igniters internally in a currently idle manufacturing plant. Additional data is as follows:

Annual volume of igniters required

400,000

Cost of purchasing equipment to produce the igniters

$2,000,000

Salvage value of equipment at the end of 5 years

$120,000

Manufacturing costs to produce the igniters

Variable cost per unit

$60

Factory supervisor (per year)

$95,000

Repairs and maintenance costs (per year)

$45,000

Increase in working capital required at the beginning (will be recovered at the end of the project)

$100,000

Required

Calculate the net present value of this investment. Would you recommend they purchase the machine? The cost of capital is 14%.

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