Mallette Manufacturing, Inc. Produces multiple lines of machine products. Currently, a single part requires specialized tools which now need to be replaced. Management has decided that the only alternative to replacing these tools is to acquire the part from an external source. ABC ltd. is willing to supply the part at a price of $50 per unit. Historically Mallette Manufacturing, Inc. uses an average of 100,000 tools per year and usage is expected to remain at this level over the next five years. Unit manufacturing costs for 2019 were as follows: Direct material $15, Direct Labour $11, Variable overhead $13, Fixed overhead $5, Total unit Cost $44

(The fixed overhead is all cash expenses with the exception of amortization, which is $2 per unit. The existing equipment is being amortized on a straight-line basis with no salvage value considered. The balance is for other fixed overhead costs that will not change regardless of whether the new specialized tools are purchased or Probe provides the parts.)

If the specialized tools are purchased, they will cost $2,000,000 and will have a salvage value of $150,000 after their expected economic life of 5 years. Straight-line amortization is used for accounting purposes. The specialized tools capital cost allowance rate is 20%. Variable conversion costs will be reduced by $2 per unit according to the manufacturer. An increase of $3 per unit in raw material cost is expected because a higher quality of materials has to be used with the new tools. The company requires a 10% after-tax return on investment, and it has a 30% tax rate.

a) Use the net present value method to determine whether Mallette Manufacturing, should replace the old tools or purchase it from ABC ltd.