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Calculate the internal rate of return of the trade-in

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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 offers 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%.

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

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

Reference no: EM133116656

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