X Company currently buys 6,000 units of a part each year from a supplier for $8.

Question

X Company currently buys 6,000 units of a part each year from a supplier for $8.10 each, but it is considering making the part instead. In order to make the part, X Company will have to buy equipment that will cost $150,000. The equipment will last for 6 years, at which time it will have zero disposal value. X Company estimates that it will cost $16,150 a year to make the 6,000 units. What is the approximate rate of return if X Company makes the part instead of buying it from the supplier? Submit Answer Tries o/s

Explanation / Answer

IRR = Lower Rate + NPV at lower rate/(NPV at lower rate- NPV at highter rate)*(difference of rate)

= 7% + 4674/(4674-4432)*2%

= 8 %

Calcualtion OF IRR NPV at 8% NPV at 9% Year Initial Cost Savings Net Cashflow Discounted Factor Discounted Cashflow Discounted Factor Discounted Cashflow a b c f g h=g*f i j=I*f 0       (150,000)     (150,000) 1.0000 (150,000) 1.0000 (150,000) 1          32,450          32,450 0.9346                 30,327 0.9174                 29,771 2          32,450          32,450 0.8734                 28,343 0.8417                 27,313 3          32,450          32,450 0.8163                 26,489 0.7722                 25,057 4          32,450          32,450 0.7629                 24,756 0.7084                 22,988 5          32,450          32,450 0.7130                 23,136 0.6499                 21,090 6          32,450          32,450 0.6663                 21,623 0.5963                 19,349 NPV 4,674 (4,432)

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