Question

X Company currently buys 6,000 units of a part each year from a supplier for $8.60 per part, but it is considering making the part instead. In order to make the part, X Company will have to buy equipment that will cost $150,000. The equipment will last for 6 years, at which time it will have zero disposal value. X Company estimates that it will cost $21,090 a year to make all 6,000 units.

What is the approximate rate of return if X Company makes the part instead of buying it from the supplier? [Note: 0.03 means 3%, etc.]

Answer 1

Cost of buying per annum =		51600
6000*8.6
Initial investment =			150000
Annual cost of manufacturing =	21,090
Annual saving if manufactured		30,510
51600-21090
we have to use financial calcualtor to solve this
put in calculator
FV				0
PV				-150000
PMT				30,510
N				6
compute I				6%
Ans =				0.06 or 6%