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I have the first part please help with second part. A bicycle manufacturer currently produces 382,000 units a year and expects output levels to remain
I have the first part please help with second part.
A bicycle manufacturer currently produces 382,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $1.80 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.60 per chain. The necessary machinery would cost $295,000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $40,000 of inventory and other working capital upfront (year 0 ), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $22,125. If the company pays tax at a rate of 20% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier? Project the annual free cash flows (FCF) of buying the chains. The annual free cash flows for years 1 to 10 of buying the chains is $ (Round to the nearest dollar. Enter a free cash outflow as a negative number.) Compute the NPV of buying the chains from the FCF. The NPV of buying the chains from the FCF is $. (Round to the nearest dollar. Enter a negative NPV as a negative number.)Step by Step Solution
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