s pt X Company currently makes 6,500 units of a component part each year, but is

Question

s pt X Company currently makes 6,500 units of a component part each year, but is considering buying it from a supplier for 7.80 cach. The current annual cost of making the part is $55,300. The supplier wants X Company to sign a contract for the next six years. If X Company buys the part, it will be able to sell the equipment that it currently uses to make the part for $10,000 but the equipment will have no salvage value at the end of six years. Assuming a discount rate of 4%, what is the net present value of buying the part instead of making it? 8. A

Explanation / Answer

Option B is correct.

Cost of making 6500 units = $ 55300

Cost of buying 6500 units = $ 50700

Saving in buying instead of making it = $ 4600 each year

PVAF(4%, 6 year) = 5.242

Present value of saving = 5.242*4600

= $ 24113.8

Inflow from sale of equipment = $10000

NPV of byuing it against making = $10000 + $24113

= $34113

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