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.

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A pencil company currently produces 200,000 units a year. It buys pencil tops from an outside...

A pencil company currently produces 200,000 units a year. It buys pencil tops from an outside supplier at a price of $2 per top. The plant manager believes that it would be cheaper to make these tops rather than buy them. Direct production costs are estimated to be only $1.50 per top. The necessary machinery would cost $150,000. This investment could be written off for tax purposes using straight-line depreciation over 8 years with no salvage value. The plant manager...

A gadget producer currently manufactures 300000 units per year. It buys gadgets’ lids from an outside...

A gadget producer currently manufactures 300000 units per year. It buys gadgets’ lids from an outside supplier at a price of 2,1 USD per 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 1,6 USD a lid. The necessary machinery would cost 155000 USD and would last 10 years. This investment could be written off for tax purposes using the seven-year accelerated tax...

A bicycle manufacturer currently produces 369,000 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

A bicycle manufacturer currently produces 369,000 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 $293,000 and would be obsolete after ten years. This investment could be depreciated to...

A bicycle manufacturer currently produces 268,000 units a year and expects output levels to remain steady...

A bicycle manufacturer currently produces 268,000 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 $276,000 and would be obsolete after ten years. This investment could...

A bicycle manufacturer currently produces 300 comma 000 units a year and expects output levels to...

A bicycle manufacturer currently produces 300 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 $ 2.00 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 $ 1.50 per chain. The necessary machinery would cost $ 250 comma 000 and would be obsolete after...

A bicycle manufacturer currently produces 201,000 units a year and expects output levels to remain steady...

A bicycle manufacturer currently produces 201,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $1.80 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 $1.50 per chain. The necessary machinery would cost $260,000 and would be obsolete after ten years. This investment could be depreciated...

A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady...

A bicycle manufacturer currently produces 300,000 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 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 $1.50 per chain. The necessary machinery would cost $250,000 and would be obsolete after 10 years. This investment could be depreciated...

A bicycle manufacturer currently produces 367,000 units a year and expects output levels to remain steady...

A bicycle manufacturer currently produces 367,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 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 $1.50 per chain. The necessary machinery would cost $221,000 and would be obsolete after ten years. This investment could be depreciated...

A bicycle manufacturer currently produces 392,000 units a year and expects output levels to remain steady...

A bicycle manufacturer currently produces 392,000 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 $294,000 and would be obsolete after ten years. This investment could be depreciated...

A bicycle manufacturer currently produces 336,000 units a year and expects output levels to remain steady...

A bicycle manufacturer currently produces 336,000 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 $1.50 per chain. The necessary machinery would cost $203,000 and would be obsolete after ten years. This investment could be depreciated...

Subjects