Replacement decision on trade in using irr technique

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Reference no: EM1312869

Replacement decision on Trade in using IRR technique

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 in the new machine is $3.5, 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'a tax rate is 30% and its discount rate is 9%.

1.Should the firm do the trade-in deal? (i.e., should the old machine be replaced?)

2.Calculate the IRR of the trade-in. (i.e., compute the IRR of the relative cash flows)

3.Plot a graph showing the profitability of the investment depending on number of units sold.

Reference no: EM1312869

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