X Company currently makes 6,500 units of a component part each year, but is cons

Question

X Company currently makes 6,500 units of a component part each year, but is considering buying it from a supplier for $8.40 each. The current annual cost of making the part is $58,800. The supplier wants X Company to sign a contract for the next five years. If X Company buys the part, it will be able to sell the equipment that it currently uses to make the part for $12,000, but the equipment will have no salvage value at the end of five years. Assuming a discount rate of 3%, what is the net present value of buying the part instead of making it? Submit Answer Tries 0/3

Explanation / Answer

Calculation of present value of savings Annual cost of making the part $58,800 Less: Purchase from outside (6,500*$8.4) $54,600 Net savings for 5 years $4,200 Annuity factor 5 years @ 3% 4.57971 Present value of savings (A) $19,235 Add: Sale value of machine (B) $12,000 Total present value savings (C=A+B) $31,234.8

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