Reference no: EM132051054

Company currently purchase tires from specialized firms. During the last financial year, the number of tires bought was 3,200 at a cost of $225,600. As a consultant, you are considering the possibility of producing these tires in-house in a workshop that will be used only for this purpose. The following information relates to the project: The workshop can be set-up in an existing warehouse that has not been used for some years and is estimated to be worth $200,000. Equipment costing $390,000 needs to be purchased with a life expectancy of 6 years. The residual value is estimated as $84,000 at the end of year 6. The annual costs in today’s money of the operation are estimated to be: Rates and maintenance $18,000 Management $22,000 Labour $47,000 Head office costs* $25,000 head office costs are a re-allocation of existing overheads. Based on the number of tires bought last year, the cost of consumable materials and other variable costs is estimated at $28,656. Taxes will be recoverable in year 2 and payable thereafter as shown in the table below: Year 2 $24,520 Recoverable Year 3 $11,630 Payable Year 4 $18,160 Payable Year 5 $22,300 Payable Year 6 $22,386 Payable Year 7 $40,496 Payable Required: Calculate the following performance indicators relating to the proposal: Net present value based on a cost of capital of 12%. Profitability index Internal rate of return Payback period in both nominal and present-value terms, and discuss which one of the two is better. with deatalis soluation.