Economics QUESTION 3 An automobile company needs to decide of outsourcing shafts or producing shafts in the company. If the company outsource the shafts, the shafts could be purchased in the first...

Extracted text: Economics QUESTION 3 An automobile company needs to decide of outsourcing shafts or producing shafts in the company. If the company outsource the shafts, the shafts could be purchased in the first year for $35 per shaft but the price of shaft for the subsequent years will increase by 5% from the previous year. If the company decide to produce the shafts, an investment of $3,000,000 needed for equipment and upgrades. The total annual cost associated with production (e.g. fixed, variable, labor and material cost) is $1,000,000. The annual demand is 40,000 shafts for the next 7 years. The new equipment purchased will have a salvage value of $450,000 at the end of year 7. If the company interest rate is 5%, which of the following statements is correct? O The company should outsource the shafts and the annual equivalent savings is $119,794 O The company should produce the shafts and the annual equivalent savings is $119,794 The company should outsource the shafts since the AEC per unit from outsourcing will be $36.58 while the AEC per unit from producing the shaft is $ 40.32 The company should produce the shafts since the AEC per unit from producing is $36.58 while the AEC per unit from outsourcing the shaft is $ 40.32