A widget manufacturer currently produces 200,000 units a year. It buys widget lids from an outside...

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 than buy them. Direct production costs are estimated to be only $1.50 a lid. The necessary machinery would cost $150,000 and would last 10 years. This investment would be written off immediately for tax purposes. The plan manager estimates that the operation would require additional working capital of $30,000 but argues that this sum can be ignored since it is recoverable at the end of 10 years. If the company pays tax at a rate of 21% and the opportunity cost of capital is 15%, would you support the plant manager’s proposal? State clearly any additional assumptions that you need to make.

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jeff jeffy answered 1 year ago

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