Business, 25.03.2020 05:06 joedawg50

Mark Industries is currently purchasing part no. 76 from an outside supplier for $80 per unit. Because of supplier reliability problems, the company is considering producing the part internally in a currently idle manufacturing plant. Annual volume over the next six years is expected to total 300,000 units at variable manufacturing costs of $75 per unit.

Racer must acquire $98,000 of new equipment if it reopens the plant. The equipment has a 6-year service life, a $15,800 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance are expected to average $7,000 per year in years 4-6, and the equipment will be sold at the end of its life. Year FV of $1 at
22% FV of an ordinary annuity at 22% PV of $1 at
22% PV of an ordinary annuity at 22%
1 1.220 1.000 0.820 0.820
2 1.488 2.220 0.672 1.492
3 1.816 3.708 0.551 2.042
4 2.215 5.524 0.451 2.494
5 2.703 7.740 0.370 2.864
6 3.297 10.442 0.303 3.167
Required:

Use the net-present-value method (total-cost approach) and a 22% hurdle rate to determine whether Racer should make or buy Part No. 76. Ignore income taxes.

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