First of all, we have some information useful for both of the projects:
* This is an 8-year project
* We will currently position ourselves in Year 1 (Y1)
* The annual output is estimated at 100,000, we have no information on the price * The original equipment is depreciated over 9 years, new machinery, over 4 years and the warehouse, over 25 years * In Y0, United Metals purchased new machinery for $45,000 This purchase will not be taken into account for the calculation of the NPV because it was made in Y0 (it is thus a past cost), we will solely include present or future cash flows * Corporate tax is 35%
I- THE MAKE NPV
If United Metals decides to produce the components itself, total direct manufacturing costs will be $50,000 plus $40,000 of raw materials each year (we do not include the capital cost of the machine).
Manufacturing costs are tax deductible, therefore we would have a total annual outflow of: 50,000+40,000=90,000
The extension of the warehouse is planned for year 4. It will cost $50,000 and is depreciated over 25 years, depreciation is tax deductible. Thus we will have a cash outflow of $50,000 in Y4, but from Y5 till the end of the project United Metals will beneficiate from a tax shield adding up to: 50,000÷25=2,000
If the purchase of the new machinery in Y0 is not taken into...