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The new equipment would allow your company to manufacture a critical component in-house instead of buying it from a supplier. This capability would help
The new equipment would allow your company to manufacture a critical component in-house instead of buying it from a supplier. This capability would help you stabilize your supply chain (which has suffered from some irregularities in the past). It could also have a positive impact on profitability through the absorption of fixed costs. There may even be a possibility that the company could leverage this capability to create a new external revenue stream by providing services to other companies. The company has been growing steadily over the past 5 years, and the financials and future prospects look good. Your CEO has asked you to run the numbers. After doing some digging into the business, you have gathered information on the following: ? The estimated purchase price for the equipment required to move the operation in-house would be $500,000. An additional net working capital would be needed in the amount of $25,000 per year to support production. The calculated cash flow savings of bringing the process in-house is 20% or annual savings of $175,000. This includes the additional labor and overhead costs required. Your company has access to a credit line and could borrow the funds at a rate of 6%. Finally, the equipment required is anticipated to have a somewhat short useful life, as a new wave of technology is on the horizon. Therefore, it is anticipated that the equipment will be sold after five years for a termination value of $25,000.
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