You work for the ACME Corporation (yes, that ACME...). The Anvil Division has a new idea for anvils that explode when struck in a particular spot. You have been given the task of completing the financial analysis to determine whether the company should purchase the new anvils from a supplier or manufacture them internally.
This will be a 5 year project. Unit sales are expected to be 500 anvils per year for each of the next 5 years.
If ACME purchases the anvils from a supplier, they will cost $250 each.
If ACME manufactures the anvils, the anvils will cost $100 each to produce. However, going this direction will require an immediate investment of $245,000 for the appropriate machinery, and an immediate investment of $30,000 in net working capital. The machinery is expected to have a salvage value of $0 at the end of the project, and will be depreciated on the straight line basis.
ACME's tax rate is 40%. ACME leadership considers this project to be of average risk compared to other company projects. The company's WACC is 15%, and the target capital structure will be maintained/held constant for the life of this project.
What is the present value of the cost to purchase the anvils from a supplier?
What is the present value of the cost to manufacture the anvils internally?