Community Challenges, a nonprofit organization for physically and mentally chall

Question

Community Challenges, a nonprofit organization for physically and mentally challenged people, manufactures a variety of products in four plants located in California. The company is currently purchasing an electronic igniter from an outside supplier for $118 per unit. Because of supplier reliability problems, the company is considering producing the igniters internally in a currently idle manufacturing plant. Annual volume over the next five years is expected to total 410,000 units at variable manufacturing costs of $115 per unit. Management must hire a factory supervisor and assistant for a total annual salary and fringe benefit package of $125,000.In addition, the company must acquire $50,000 of new equipment. The equipment has a five-year service life and a $10,000 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance are expected to average $5,500 per year in years 3-5, and the equipment will be sold at the end of its life. Use the net-present-value method (total-cost approach) and a 14 percent hurdle rate to calculate the net present value of the decision to outsource and the net present value of the decision to manufacture.

Explanation / Answer

Working:

Amount ($) Net Present value(Outsource)          165,943,400 Net Present value(Manufacture)          162,207,895

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