15. Project NPV (S6.3) A widget manufacturer currently produces 200,000 units a year. It buys widget lids from an Page 176outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper to make these lids rather than buythem. Direct production costs are estimated to be only $1.50 a lid. The necessary machinery would cost $150,000 and wouldlast 10 years. This investment could be written off immediately for tax purposes. The plant manager estimates that theoperation would require additional working capital of $30,000 but argues that this sum can be ignored since it is recoverableat the end of the 10 years. If the company pays tax at a rate of 21% and the opportunity cost of capital is 15%, would yousupport the plant manager's proposal? State clearly any additional assumptions that you need to make.

NPV is time value based method of capital budgeting and is based on the time value of money and can…

Answered: Project NPV (S6.3) A widget…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 11E

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