

Background
We refer to the case in the finance textbook for the details. Throughout our efforts in determining the right decision for United Metal, our team decided to calculate the difference between the ‘Make’ or ‘Buy’ options, using the numbers given in the case. However, in order to determine the net present value (NPV) and make appropriate recommendations, a risk adjusted discount rate (rateofreturn or ‘r’) needs to be incorporated. As r has not been provided in the document, we determined the NPV using different risk adjusted discount rates in 3 separate scenarios. The ‘Make’ decision  Numbers
* 100.000 units per year with 2.0 USD selling price worth each, cost of 0.95 USD per unit, makes an overall cost of 95.000 USD per year. * Tax savings of 1750 USD per year (depreciation of machinery of 45.000 USD over 9 years at 35%) * Warehouse investment in 4th year of 50.000 USD and from year 4th including tax savings of 700 USD per year related to this investment. The ‘Buy’ decision  Numbers
* 100.000 units per year with 2.0 USD selling price worth each, cost of 0.83 USD per unit makes overall cost of 95.000 USD per year. * 5000 USD for selling old machinery
* Purchase of new machinery for 8000 USD
* Tax savings new machine of 700 USD for 4 years
* Tax savings of 1750 USD for year 0
* Warehouse investment of 50.000 USD for year 3
* Tax savings for year 3 till 8 of 700 USD per year
* Working capital (additional stock holding of 15.000 units at 0.83 USD per unit adding to a total of 12.450 USD in year 1, returned at year 8)
We include an additional note on the 1year later Warehouse investment of 50.000 USD. From the information provided it remains unclear what the financial consequence is of this oneyear later investment. It can be assumed this amount of money would have been invested in other projects or invested in any another sense. However, given the multiple possibilities, we chose not to account for the difference in this 1year later investment. We also assume Sales as component of cashflow, though the considered investment is only a stage in production cycle, and does not generate any direct revenues. Our suppositions are also based on Costs and additional factors (such as Tax savings).
UNITED metal           Year 0 1 2 3 4 5 6 7 8 
operating costs  95000 95000 95000 95000 95000 95000 95000 95000            
warehouse     50000      tax saving of early depreciation of warehouse     700 700 700 700 700  tax savings (depreciation of machinery) 1750 1750 1750 1750 1750 1750 1750 1750 1750  Cft 1750 93250 93250 93250 142550 92550 92550 92550 92550 790750 DCF 1750 84009 75684 68184 93902 54924 49481 44577 40160 509171           
          
ALMALGAMATED components           Year 0 1 2 3 4 5 6 7 8 
operating costs 0 83000 83000 83000 83000 83000 83000 83000 83000  sell of machine 5000 0 0 0 0 0 0 0 0  warehouse 0 0 0 50000 0 0 0 0 0 
plant and machinery 8000 0 0 0 0 0 0 0 0  tax savings new machine 700 700 700 700 0 0 0 0 0  tax saving of early depreciation of warehouse 0 0 0 700 700 700 700 700 700  tax saving write off of new machine  0 0 0 0 0 0 0 0 0  tax deductable  1750          working capital  0 12450 0 0 0 0 0 0 12450  Cft 550 94750 82300 131600 82300...