Woolcott Industries

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This year Woolcott Industries will produce 500,000 drones, and each drone requires wings. Woolcott buys wings from an outside supplier at a price of $3.50 each, but the Woolcott plant manager believes that it would be cheaper to make these wings in-house rather than buy them. Direct in-house production costs are estimated to be only $3.00 per wing. The necessary machinery would cost $800,000 this year. This investment would be depreciated to zero for tax purposes using straight line depreciation over the machine’s 10-year productive life, beginning next year. After 10 years in production, the machine will be obsolete and will have no salvage value. The plant manager estimates that the operation would require additional working capital of $60,000 this year but argues that this sum can be ignored since it is recoverable at the end of the ten years. Woolcott pays tax at a rate of 30% and has an opportunity cost of capital of 12%. What is the NPV of manufacturing the wings in house instead of purchasing them from the supplier?

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