Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I need help solving the attached problem. All of the required information to solve the problem is within the attached photograph. A bicycle manufacturer currently

image text in transcribed

I need help solving the attached problem. All of the required information to solve the problem is within the attached photograph.

image text in transcribed
A bicycle manufacturer currently produces 352,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 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 $1.50 per chain. The necessary machinery would cost $210,000 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 $58,000 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 $15,750. If the company pays tax at a rate of 35% 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 ows (FCF) of buying the chains. The annual free cash ows for years 1 to 10 of buying the chains is $ . (Round to the nearest dollar. Enter a free cash outflow as a negative number.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International financial management

Authors: Jeff Madura

13th edition

978-1337099738, 1337099732, 9781337515894, 1337515892, 978-1337587211

More Books

Students also viewed these Finance questions

Question

What is the goal of a media partnership?

Answered: 1 week ago