An automobile company needs to decide of outsourcing shafts or producing shafts in the company. If the company outsource the shafts, the shafts could be purchased kin the first year for $30 per shaft but the price of shaft for the subsequent years will increase by 5% from the previous year. If the company decide to produce the shafts, an investment of $3,000,000 needed for equipment and upgrades. The total annual cost associated with production (e.g. fixed, variable, labor and material cost) is $1,000,000. The annual demand is 40,000 shafts for the next 7 years. The new equipment purchased will have a salvage value of $450,000 at the end of year 7.

Financial Management: Theory & Practice
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Chapter11: Cash Flow Estimation And Risk Analysis
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QUESTION 23
An automobile company needs to decide of outsourcing shafts or producing shafts in the company. If the company outsource the shafts, the shafts could be purchased
ein the first year for $30 per shaft but the price of shaft for the subsequent years will increase by 5% from the previous year. If the company decide to produce the shafts,
an investment of $3,000,000 needed for equipment and upgrades. The total annual cost associated with production (e.g. fixed, variable, labor and material cost) is
$1,000,000. The annual demand is 40,000 shafts for the next 7 years. The new equipment purchased will have a salvage value of $450,000 at the end of year 7.
If the company interest rate is 5%, which of the following statements is correct?
O The company should outsource the shafts and the annual equivalent savings is $91,564
O The company should produce the shafts and the annual equivalent savings is $91,564
O The company should outsource the shafts since the AEC per unit from outsourcing will be $34.56 while the AEC per unit from producing the shaft is $ 36.58
O The company should produce the shafts since the AEC per unit from producing is $34.56 while the AEC per unit from outsourcing the shaft is $ 36.58
Transcribed Image Text:QUESTION 23 An automobile company needs to decide of outsourcing shafts or producing shafts in the company. If the company outsource the shafts, the shafts could be purchased ein the first year for $30 per shaft but the price of shaft for the subsequent years will increase by 5% from the previous year. If the company decide to produce the shafts, an investment of $3,000,000 needed for equipment and upgrades. The total annual cost associated with production (e.g. fixed, variable, labor and material cost) is $1,000,000. The annual demand is 40,000 shafts for the next 7 years. The new equipment purchased will have a salvage value of $450,000 at the end of year 7. If the company interest rate is 5%, which of the following statements is correct? O The company should outsource the shafts and the annual equivalent savings is $91,564 O The company should produce the shafts and the annual equivalent savings is $91,564 O The company should outsource the shafts since the AEC per unit from outsourcing will be $34.56 while the AEC per unit from producing the shaft is $ 36.58 O The company should produce the shafts since the AEC per unit from producing is $34.56 while the AEC per unit from outsourcing the shaft is $ 36.58
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