Your firm uses a manufacturing machine that was purchased 6 years ago.

The machine’s book value today is 0, and you assume it can work for 5 years more. The production cost with this machine is £6 per unit. Your supplier offered a new machine in a trade-in deal. The new machine’s cost is £55,000, and the supplier is willing to purchase the old machine from you for £18,000. The production cost per unit for the new machine is £3.50, and the new machine has straight-line depreciation for 5 years to zero terminal value. You have estimated that your firm will sell 6500 units per year, with a selling price of £17 each. The firm’s tax rate is 30% and its discount rate is 9%.

1. Should the firm do the trade-in deal? Explain your answer and show all the workings.

2. Calculate the Internal Rate of Return (IRR) of the trade-in. Explain your answer and show all the workings. 

3. Plot a graph showing the profitability of the investment depending on the number of units sold. Explain your answer and show all the workings.

 

Answer rating: 100% (QA)

1 Should the firm do the tradein deal No the firm shouldnt do the tradein deal based on the current information We will explain why below Cash Flow An... View the full answer