1921 Words8 Pages

PROJECT APPRAISAL
CASE STUDY UNITED METAL
0
1. Introduction United Metal manufactures a certain component with a machine it purchased over a year ago for $45,000 (the “Manufacturing Equipment”). To produce 100,000 items a year, United Metal incurs manufacturing costs of $50,000 and spends $40,000 further in raw material. It is expected that United Metal will need to produce this component at the same level for another 8 years. One of its suppliers, Amalgamated Components, has offered to produce said component for 83p per piece. United Metal wishes to consider whether it is financially more interesting to make the components (the “Make” option) or have them produced by its competitor (the “Buy” option). To compare the two options in a figure basis, we have calculated the net present value (NPV) of each of these scenarios. The following report outlines assumptions and calculation result of NPV of the two options, explains the numbers we have used in our calculations, provides an analysis of our results pursuant to which we conclude that United Metal should decide to buy the components from its supplier and ends with a few notes on the arguments set forth by the managers of United Metal in the case. For the purposes of this analysis, we are working with NPV rather than other rules such as accounting income. The NPV depends on future cash flows. Income statements are intended to show how well the company is performing. It includes some cash flows and excludes others. To compare our two options, we have compared the cash flow on an after-tax basis.
2. Assumptions We have taken more assumptions in addition to the assumptions listed in the case 1 to support a comparison of NPV on the same dimension. Output. 100,000 units will be required for each year of the project. Profits and income. The company will earn sufficient profits in the future 8 years and tax

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