X Company currently makes 7,000 units of a component part each year, but is cons
ID: 2512893 • Letter: X
Question
X Company currently makes 7,000 units of a component part each year, but is considering buying it from a supplier for $7.50 each. The current annual cost of making the part is $57,500. 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? 73389 Submit Answer Incorrect. Tries 2/3 Previous TriesExplanation / Answer
Calculation of present value of savings
Annual cost of making the part
$57,500
Less: Purchase from outside (7,000*$7.5)
$52,500
Net savings for 6 years
$5,000
Annuity factor 6 years @4%
5.24214
Present value of savings (A)
$26,211
Add: Sale value of machine (B)
$10,000
Total present value savings (C=A+B)
$36,210.7
Calculation of present value of savings
Annual cost of making the part
$57,500
Less: Purchase from outside (7,000*$7.5)
$52,500
Net savings for 6 years
$5,000
Annuity factor 6 years @4%
5.24214
Present value of savings (A)
$26,211
Add: Sale value of machine (B)
$10,000
Total present value savings (C=A+B)
$36,210.7
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