A bicycle manufacturer currently produces
308 comma 000
units a year and expects output levels to remain steady in thefuture. It buys chains from an outside supplier at a price of
$ 1.90
a chain. The plant manager believes that it would be cheaper tomake these chains rather than buy them. Direct​ in-house productioncosts are estimated to be only
$ 1.40
per chain. The necessary machinery would cost
$ 279 comma 000
and would be obsolete after ten years. This investment could bedepreciated to zero for tax purposes using a​ ten-yearstraight-line depreciation schedule. The plant manager estimatesthat the operation would require
$ 45 comma 000
of inventory and other working capital upfront​ (year 0), butargues that this sum can be ignored since it is recoverable at theend of the ten years. Expected proceeds from scrapping themachinery after ten years are
$ 20 comma 925
.
If the company pays tax at a rate of
35 %
and the opportunity cost of capital is
15 %
​,
what is the net present value of the decision to produce thechains​ in-house instead of purchasing them from the​ supplier?
