Use the Following Information to Answer the Question(s)below

question 76

Multiple Choice

Use the following information to answer the question(s) below.
Galt Motors currently produces 500,000 electric motors a year and expects output levels to remain steady in the future.It buys armatures from an outside supplier at a price of $2.50 each.The plant manager believes that it would be cheaper to make these armatures rather than buy them.Direct in-house production costs are estimated to be only $1.80 per armature.The necessary machinery would cost $700,000 and would be obsolete in 10 years.This investment would be depreciated to zero for tax purposes using a 10-year straight line depreciation.The plant manager estimates that the operation would require additional working capital of $40,000 but argues that this sum can be ignored since it is recoverable at the end of the ten years.The expected proceeds from scrapping the machinery after 10 years are estimated to be $10,000.Galt Motors pays tax at a rate of 21% and has an opportunity cost of capital of 14%.
-What decision should Galt Motors take regarding manufacturing the armatures in house?

• A)Proceed with in-house manufacture since NPV is negative
• B)Proceed with in-house manufacture since NPV is positive
• C)Reject in-house manufacture since NPV is negative
• D)Reject in-house manufacture since IRR is greater than 14%

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Definitions:

Inexpensive Process

A procedure or series of steps that are cost-effective and do not require a significant financial investment.

Useful Data

Information that is relevant, accurate, and can be applied to inform decisions, enhance understanding, or solve a problem.

Domestic Market

A marketplace within a country's borders, representing the total supply and demand for products and services under the jurisdiction of that country's regulations and economic policies.

Global Segmentation

The practice of dividing a market into distinct groups of buyers on a global scale based on various factors like demographics, needs, priorities, common interests, and other psychographic or geographic criteria.