Question

A bicycle manufacturer currently produces 312,000 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 $1.60 per chain. The necessary machinery would cost $243,000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $51,000 of inventory and other working capital upfront (year o), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $18,225. If the company pays tax at a rate of 20% 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? Project the annual free cash flows (FCF) of buying the chains. 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 $ . (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.) 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 $ . (Round to the nearest dollar. Enter a free cash outflow as a negative number.)

Answer 1

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Wrap Text General is r 188 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri 11 AA = = = pt Wrap Text General Ea Copy Fill Paste B I U - D A SF Merge Merge & Center Center $ - % % 4:0 .00 8.9 Format Painter Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing ZP197 zo ZP ZO ZR - ZS ZT ZU ZV ZW ZX ZY Z AAR 182 183 a IF WE PURCHASE FROM OUTSIDE SUPPLIER 184 CASHFLOW (FCF) PER YEAR = 312000 X-2.1 X (1-0.2) = -524160 (FROM YEAR 1 TO 10 ] 185 (EXPENSES ARE TAX DEDUCTIBLE) 186 187 b NPV = PV OF ALL CASH FLOWS AT 15% DISCOUNT RATE NPV = [-524160 X PVIFA @15%, 10 YEARS ] 189 NPV = (-524160*(1/0.15)*(1-(1/1.15410))] 190 NPV = -2630637.76 -2630638 (ROUNDED TO ZERO DECIMAL) 191 192 C INITIAL CASH FLOW FROM PRODUCING CHAINS = -243000 + (-51000) = -294000 193 PURCHASE PRICE OF EQUIPMENT = -243000 194 INITIAL WORKING CAPITAL = -51000 195 196 197 198 199 200 I RRnpvbeta RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STI Rea ferences: ED12 BOU 130% 0 ODOB 9 * * OENG 01-11-2019 H

- 2x AA 198 X 2 E. = projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins * Cut Σ AutoSum : A Calibri 11 AA = = = pt Wrap Text General E Copy Fill Paste B I U - D SF A Merge Merge & Center Center Format Painter $ - % % 4:0 .00 8.9 Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing ZX214 ZO - ZP ZO ZR ZSZT ZU ZW | ZX ZY Z 196 THE CALCULATION OF CASH FLOW 197 PRODUCTION COST -499200 (312000 X-1.6) DEPRECIATION -24300 (243000/10) (STRAIGHT LINE METHOD = COST/LIFE) 199 PROFIT BEFORE TAXES -523500 200 TAXES (20%) 104700 201 NET INCOME -418800 202 DEPRECIATION 24300 203 CASH FLOW -394500 204 205 d THIS IS THE CASH FLOW FOR YEAR 1 TO YEAR 9 : -394500 206 e CASH FLOW IN YEAR 10 = ANNUAL CASH FLOW + AFTER TAX SALVAGE VALUE + RECOVERY OF WORKING CAPITAL 207 CASH FLOW IN YEAR 10 = -394500 + 18225(1-0.2) + 51000 = -328920 208 209 f NPV = PV OF ALL CASHFLOWS - INITIAL CASH OUT FLOW 210 NPV = (-394500*(1/0.15)*(1-(1/1.1519)) + (-328920)*(1/1.15410)] + [-294000] 211 NPV = -2257693.85 -2257694 (ROUNDED TO ZERO DECIMAL) 212 213 g DIFFERENCE = 372943.91 [-2257694-(-2630638)] 214 372944 (ROUNDED TO ZERO DECIMAL) I RRnpvbeta RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STI Rea ferences: DX15 BOU 130% . DO 4 * 4 OENG H 0 07:25 01-11-2019