Nima Company is investigating the feasibility of manufacturing one of the components needed for its finished product rather than purchasing it from…
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Nima Company is investigating the feasibility of manufacturing one of the
components needed for its finished product rather than purchasing it from an
outside supplier. Its present supplier has just announced that it intends to increase
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the price from Br500 to Br600 per unit.
The equipment needed to make this product can be purchased for Br3,000,000 and
is expected to have salvage value of Br500,000 at the end of fifth year. It is to be
depreciated using straight line method. The product will be produced in a building
which it is currently renting to an outside firm for Br150,000 per year. Additional
fixed manufacturing costs (excluding depreciation) are estimated to increase by
Br600,000 per year. The variable manufacturing costs of each component will be
Br200 per unit. But it will increase to Br250 per unit starting from beginning of
year 3. The company projects annual needs at 10,000 units for 5-year period.
Average inventory balance will increase by Br250,000 but current liabilities will
decrease by Br50,000 due to manufacturing of this product. There will be no
changes in other current assets. Annual interest payment on debt used to finance
this project will be Br100,000 and is a tax deductible expense. The tax rate is 30%.
Required: Calculate the relevant cash flows of this project for each year