problem: Your firm uses a manufacturing machine that was purchased six years ago. The machine’s book rate today is 0, & you suppose it can work for five years more. The production cost with this machine is dollar six per unit. Your supplier offered a new machine in a trade in deal. The new machine’s cost is dollar 55,000, and the supplier is willing to buy the old machine from you for dollar 18,000. The production cost per unit in the new machine is dollar 3.5, & the new machine has straight line depreciation for five years to zero terminal value. You have determined that your firm will sell 6500 units per year, with a selling price of dollar 17 each. The firm’s tax rate is 30 percent and its discount rate is 9 percent.
[A] Should the firm do the trade-in deal? [i.e., should the old machine be replaced?]
[B] Compute the IRR of the trade-in. [i.e., find out the IRR of the relative cash flows]
[C] Make a graph showing the profitability of the investment depending on number of units sold