Question

Community Challenges, a nonprofit organization for physically and mentally challenged

people, manufactures a variety of products in four plants located in Eastern Ontario. The

company is currently purchasing an electronic igniter from an outside supplier for $62

per unit. Because of supplier reliability problems, the company is considering producing

the igniters internally in a currently idle manufacturing plant. Additional data is as follows:

Annual volume of igniters required	400,000
Cost of purchasing equipment to produce the igniters	$2,000,000
Salvage value of equipment at the end of 5 years	$120,000
Manufacturing costs to produce the igniters
Variable cost per unit	$60
Factory supervisor (per year)	$95,000
Repairs and maintenance costs (per year)	$45,000
Increase in working capital required at the beginning (will be recovered at the end of the project)	$100,000

Required –

Calculate the net present value of this investment. Would you recommend they purchase the machine? The cost of capital is 14%.