Homework Help is Here – Start Your Trial Now!
Business
Finance
The annual free cash flows for years 1 to 10 of buying the chains is $. (Round to the nearest dollar. Enter a free cash outflow as a negative number.) Compute the NPV of buying the chains from the FCF. The NPV of buying the chains from the FCF is S. (Round to the nearest dollar. Enter a negative NPV as a negative number.) Compute the initial FCF of producing the chains. The initial FCF of producing the chains is $. (Round to the nearest dollar. Enter a free cash outflow as a negative number.)

The annual free cash flows for years 1 to 10 of buying the chains is $. (Round to the nearest dollar. Enter a free cash outflow as a negative number.) Compute the NPV of buying the chains from the FCF. The NPV of buying the chains from the FCF is S. (Round to the nearest dollar. Enter a negative NPV as a negative number.) Compute the initial FCF of producing the chains. The initial FCF of producing the chains is $. (Round to the nearest dollar. Enter a free cash outflow as a negative number.)

Essentials Of Investments
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
See similar textbooks
icon
Related questions
Question

Q25

A bicycle manufacturer currently produces 323,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.20 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 $254,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposes using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require $26,000 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 $19,050. If the company pays tax at a rate of 25% 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? The annual free cash flows for years 1 to 10 of buying the chains is $ Compute the NPV of buying the chains from the FCF. The NPV of buying the chains from the FCF is $ Compute the initial FCF of producing the chains. The initial FCF of producing the chains is $. (Round to the nearest dollar. Enter a free cash outflow as a negative number.) Compute the FCF in years 1 through 9 of producing the chains. The FCF in years 1 through 9 of producing the chains is $. (Round to the nearest dollar. Enter a free cash outflow as a negative number.) Compute the FCF in year 10 of producing the chains. The FCF in year 10 of producing the chains is $ Compute the NPV of producing the chains from the FCF. The NPV of producing the chains from the FCF is $. (Round to the nearest dollar. Enter a negative NPV as a negative number.) Compute the difference between the net present values found above. The net present value of producing the chains in-house instead of purchasing them from the supplier is $ (Round to the nearest dollar. Enter a free cash outflow as a negative number.) (Round to the nearest dollar. Enter a negative NPV as a negative number.) (Round to the nearest dollar. Enter a free cash outflow as a negative number.) (Round to the nearest dollar.)
Transcribed Image Text:A bicycle manufacturer currently produces 323,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.20 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 $254,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposes using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require $26,000 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 $19,050. If the company pays tax at a rate of 25% 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? The annual free cash flows for years 1 to 10 of buying the chains is $ Compute the NPV of buying the chains from the FCF. The NPV of buying the chains from the FCF is $ Compute the initial FCF of producing the chains. The initial FCF of producing the chains is $. (Round to the nearest dollar. Enter a free cash outflow as a negative number.) Compute the FCF in years 1 through 9 of producing the chains. The FCF in years 1 through 9 of producing the chains is $. (Round to the nearest dollar. Enter a free cash outflow as a negative number.) Compute the FCF in year 10 of producing the chains. The FCF in year 10 of producing the chains is $ Compute the NPV of producing the chains from the FCF. The NPV of producing the chains from the FCF is $. (Round to the nearest dollar. Enter a negative NPV as a negative number.) Compute the difference between the net present values found above. The net present value of producing the chains in-house instead of purchasing them from the supplier is $ (Round to the nearest dollar. Enter a free cash outflow as a negative number.) (Round to the nearest dollar. Enter a negative NPV as a negative number.) (Round to the nearest dollar. Enter a free cash outflow as a negative number.) (Round to the nearest dollar.)
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 2 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Break-even Analysis
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS