A bicycle manufacturer currently produces 371 comma 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 $ 1.90 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 $ 284 comma 000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposes using a 10- year stra -line depreciation schedule. The plant manager estimates that the operation would require $ 55 comma 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 10 years. Expected proceeds from scrapping the machinery after 10 years are $ 21 comma 300. If the company pays tax at a rate of 30 % 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? A) The FCF in years 1 through 9 of producing the chains is $__ B)Compute the FCF in year 10 of producing the chains. C) Compute the NPV of producing the chains from the FCF.
A bicycle manufacturer currently produces 371 comma 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 $ 1.90 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 $ 284 comma 000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposes using a 10- year stra -line depreciation schedule. The plant manager estimates that the operation would require $ 55 comma 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 10 years. Expected proceeds from scrapping the machinery after 10 years are $ 21 comma 300. If the company pays tax at a rate of 30 % 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? A) The FCF in years 1 through 9 of producing the chains is $__ B)Compute the FCF in year 10 of producing the chains. C) Compute the NPV of producing the chains from the FCF.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A bicycle manufacturer currently produces 371 comma
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 $ 1.90 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 $ 284 comma 000 and
would be obsolete after 10 years. This investment could
be depreciated to zero for tax purposes using a 10-
year stra -line depreciation schedule. The plant
manager estimates that the operation would require $
55 comma 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 10
years. Expected proceeds from scrapping the
machinery after 10 years are $ 21 comma 300. If the
company pays tax at a rate of 30 % 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? A) The FCF in years
1 through 9 of producing the chains is $__ B)Compute
the FCF in year 10 of producing the chains. C) Compute
the NPV of producing the chains from the FCF.
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