X Company currently makes 8,000 units of a component part each year, but is cons

Question

X Company currently makes 8,000 units of a component part each year, but is considering buying it from a supplier for $8.80 each. The current annual cost of making the part is $73,400. The supplier wants X Company to sign a contract for the next six years. If X Company buys the part, it will be able to sell the equipment that it currently uses to make the part for $18,000, but the equipment will have no salvage value at the end of six years. Assuming a discount rate of 4%, what is the net present value of buying the part instead of making it? Submit Answer Tries 0/3

Explanation / Answer

Solution:

Computation of NPV - Buying proposal- X Company Particulars Period Amount Discount rate - 4% PV Factor Present Value Cash Outflows: Annual cost of buying 1-6 $70,400.00 5.242136857 $369,046.43 Present value of cash outflows (A) $369,046.43 Cash Inflows: Saving in annual making cost 1-6 $73,400.00 5.24214 $384,772.85 Sale value of equipment 0 $18,000.00 1 $18,000.00 Present value of cash Inflows (B) $402,772.85 NPV (B-A) $33,726.41

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