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A manufacturing firm with a cost of capital of 12% is currently operating at below capacity and can take on additional manufacturing work as a subcontractor for another company. If it conserves this excess capacity, it will not need to develop new capacity, which costs $5M, to meet rising consumer demand for its services until the end of the third year. If it takes on the subcontracting job, it will realize revenues in the form of subcontracting fees immediately and at the beginning of each of the next two year but will need to develop new capacity at the end of this year. How much does the firm need to charge in annual subcontracting fees in order to make subcontracting preferable to conserving its excess capacity?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92806158

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