Q1) Your firm utilizes a manufacturing machine which was bought 6 years ago. Machine's book value today is 0, and you suppose it can work for 5 years more. Production cost with this machine is $6 per unit. Your supplier offered new machine in a trade-in deal. New machine's cost is $55,000, and supplier is willing to buy old machine from you for $18,000. Production cost per unit in new machine is $3.5, and new machine has straight line depreciation for 5 years to zero terminal value. You have evaluated that your firm will sell 6500 units per year, with selling price of $17 each. Firm'a tax rate is 30% and its discount rate is 9%.
1. Should firm do the trade-in deal? (that is, should old machine be replaced?)
2. Compute IRR of the trade-in. (that is, find out IRR of the relative cash flows)
3. Plot graph illustrating profitability of investment depending on number of units sold.