Project NPV (S6.3) A widget manufacturer currently produces 200,000 units a year. It buys widget lids from an outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper to make these lids rather t them. Direct production costs are estimated to be only $1.50 a lid. The necessary machinery would cost $150,000 an last 10 years. This investment could be written off immediately for tax purposes. The plant manager estimates that th operation would require additional working capital of $30,000 but argues that this sum can be ignored since it is reco at the end of the 10 years. If the company pays tax at a rate of 21% and the opportunity cost of capital is 15%, would support the plant manager's proposal? State clearly any additional assumptions that you need to make
Project NPV (S6.3) A widget manufacturer currently produces 200,000 units a year. It buys widget lids from an outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper to make these lids rather t them. Direct production costs are estimated to be only $1.50 a lid. The necessary machinery would cost $150,000 an last 10 years. This investment could be written off immediately for tax purposes. The plant manager estimates that th operation would require additional working capital of $30,000 but argues that this sum can be ignored since it is reco at the end of the 10 years. If the company pays tax at a rate of 21% and the opportunity cost of capital is 15%, would support the plant manager's proposal? State clearly any additional assumptions that you need to make
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:**Project NPV Analysis (Section 6.3)**
A widget manufacturer currently produces 200,000 units annually. It purchases widget lids from an external supplier at $2 per lid. The plant manager suggests it might be more economical to produce the lids in-house. The estimated direct production cost is $1.50 per lid. The necessary machinery for this process would cost $150,000 and has a lifespan of 10 years. For accounting purposes, this investment is eligible for immediate tax write-off.
Additionally, the plant manager projects that this operation will necessitate an extra working capital of $30,000. However, it is argued that this can be disregarded as it’s recoverable after 10 years. Considering a corporate tax rate of 21% and an opportunity cost of capital at 15%, evaluate if the plant manager’s proposal is financially viable. Clearly outline any assumptions you make in your assessment.
(Note: There are no graphs or diagrams in the image.)
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