Final answer:
To determine the NPV of the decision to produce the chains in-house, you would project the annual (FCF) of buying the chains and compute the NPV by discounting the cash flows at a 15% interest rate. The FCF in years 1 through 9 of producing the chains can be calculated similarly. The NPV and FCF values would be expressed as negative numbers.
Step-by-step explanation:
The net present value (NPV) of the decision to produce the chains in-house instead of purchasing them from the supplier can be calculated by projecting the annual free cash flows (FCF) of buying the chains over a certain period of time. The NPV is determined by discounting the projected cash flows to their present value at a given interest rate of 15%.
To compute the NPV of buying the chains, you would subtract the initial investment or outflow of cash from the present value of the cash inflows over the years. On the other hand, to compute the initial FCF of producing the chains, you would subtract the initial investment or outflow of cash from the present value of the cash inflows for Year 0 (the first year).
For example, if the annual free cash flows for buying the chains for years 1 to 10 are denoted as S (rounded to the nearest dollar), and the initial FCF of producing the chains is denoted as s (rounded to the nearest dollar), you would discount each year's cash flows using the 15% interest rate to determine their present value. Then, you would sum up the present values to obtain the NPV of buying the chains and the FCF in years 1 through 9 of producing the chains. The NPV and FCF values would be recorded as negative numbers to indicate cash outflows.