Corporate finance Essay Example | Topics and Well Written Essays - 1250 words

Corporate finance - Essay Example 1. The argument of the purchasing manger that there would be savings of $96000 over a period of eight years holds no grounds. First of all it is not clear whether manager is arguing the saving in absolute terms (net cash flow) or in terms of profits. The manger has calculated the savings of $96000 as under: The calculations of purchasing manager are absolutely wrong, as he is taking total cost of manufacturing of the present in- house activity and comparing it with only cost of purchasing the component from Amalgament Components. Manufacturing costs and purchasing price are altogether incomparable costs. He has altogether ignored the many expenses required to be added to the cost of purchases to make it comparable to manufacturing cost, like depreciation on Scanner of $8000, freight inward, assembling cost of the product, salaries of administrative and selling staff and many other assembling, administrative, selling expenses, and even the taxation outflows. 2. The suggestion of selling the machinery is absolutely illogical. The machinery was purchased only one year back for $45000 and selling only for $5000 is no good suggestion, considering the fact that the firm would suffer a loss to the tune of $35000 after taking into account capital allowance for two years. If at all machinery is to sold, it should be done at a time when the proposal of buying the component actually start bringing profits, as the machinery has got few alternative uses as per production manager. 3. The argument about only 60% use for current 4 years of warehouse holds grounds when $50000 is planned to be spent on extension of warehousing facilities after the fourth year, particularly when a capital allowance can be claimed @ 4%. The matter needs serious consideration while evaluating the buying option. 1. The argument of production manager that present machinery holds 8 years of useful life, and also machinery could be used for alternative purposes as well are valuable arguments from