X Company currently buys 11,000 units of a component part each year from a supplier for...
X Company currently buys 11,000 units of a component part each year from a supplier for $7.50 each but is considering making them instead. Variable costs of making would be $4.50 per unit; additional annual fixed costs would be $6,500. Equipment would have to be purchased for $30,000 and will last for 7 years, at which time it will have a disposal value of $6,000. Assuming a discount rate of 4%, what is the net present value of making the part instead of continuing to buy it?
Homework Answers
| Particulars | Amount | Present value factor | Present Value |
| Net Present value making the part: | |||
| Equipment | $30,000 | 1.000 | $30,000 |
| Annual fixed costs | 6,500 | 5.836 | 37, 934 |
| Less: Saving in variable cost [11000 x (7.50 - 4.50)] | 33,000 | 5.836 | 192,588 |
| Less: Disposal value | 6000 | 0.760 | 4,560 |
| Net Present value making the part instead of buying it | $129,214 |
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