Question
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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