The supplier for widgets component for ABB has increased the prices by another 10 per cent, in line with similar increases for each of the last five years. Based on the assumption that this pattern will continue, the cost of these widgets will be

The supplier for widgets component for ABB has increased the prices by another 10 per cent, in line with similar increases for each of the last five years. Based on the assumption that this pattern will continue, the cost of these widgets will be: Point in time (yearly) 1 2 3 4 5 Payment for widgets (Rands) 100 000 110 000 121 000 133 100 146410 ABB is convinced that that the expertise for the manufacture of widgets exists within the company. The company therefore proposes the purchase of the necessary machine tools and other items of equipment to produce widgets in-house, at a cost of R70 000. The net cash outflows associated with this course of action are: Point in time (yearly) 0 1 2 3 4 | 5 Cash outflows 70 000 80 000 82 000 84 000 86 000 88 000 Note figures include the R70 000 for equipment and operating costs, etc The machinery has a lifespan of five years and can be sold for scrap at the end of its lifespan for R20 000. This is not included in the R88 000 for year 5. The installation of the new machine will require the attention of the technical services manager during the first year. She will have to abandon other projects as a result, causing a loss of net income of R68 000 from those projects. This cost has not been included in the above figures. The relevant discount rate is 20 per cent, and all cash flows occur at year ends except the initial investment. Required: Help ABB to decide whether to produce widgets for itself. What other factors might influence this decision? The supplier for widgets component for ABB has increased the prices by another 10 per cent, in line with similar increases for each of the last five years. Based on the assumption that this pattern will continue, the cost of these widgets will be: Point in time (yearly) 1 2 3 4 5 Payment for widgets (Rands) 100 000 110 000 121 000 133 100 146410 ABB is convinced that that the expertise for the manufacture of widgets exists within the company. The company therefore proposes the purchase of the necessary machine tools and other items of equipment to produce widgets in-house, at a cost of R70 000. The net cash outflows associated with this course of action are: Point in time (yearly) 0 1 2 3 4 | 5 Cash outflows 70 000 80 000 82 000 84 000 86 000 88 000 Note figures include the R70 000 for equipment and operating costs, etc The machinery has a lifespan of five years and can be sold for scrap at the end of its lifespan for R20 000. This is not included in the R88 000 for year 5. The installation of the new machine will require the attention of the technical services manager during the first year. She will have to abandon other projects as a result, causing a loss of net income of R68 000 from those projects. This cost has not been included in the above figures. The relevant discount rate is 20 per cent, and all cash flows occur at year ends except the initial investment. Required: Help ABB to decide whether to produce widgets for itself. What other factors might influence this decision