Trivet Case Study

Trivet

Our mission is to find out if the Vice President of the trivet division should invest in a new trivet machine. A calculation needs to be done to compare the benefits between buying a new machine and keeping the old one. There is also an option of selling the old machine in case buying the new machine decision is made.

The current machine was bought 5 years ago and cost the company $100,000. The machine currently being used is capable of producing 300 trivets per month. The machine is relatively old and is starting to require repairs ranging from $50 to $100 per month. The repairs are not expensive yet but they are accumulating and over time can be costly for the company. However, there is a market for used machinery and the current machine can be sold for as much as $5000. It seems unreasonable that the price of the machine dropped 20 times but it might still be beneficial to sell it.

The new machine is much more advanced than the old one and it is capable of producing 750 units, which is 2.5 times more than the old machine. Since the machine is new there are no major repairs for at least the next 5 years and the machine should be able to sell for about twice as much as the current machine ($10000).

The cash flow table shows us when the new machine will start making money for the company. Between year 3 and 4 the machine will break even and by year 5 the net value of the machine at a discounted rate of 15% will be $61,740. The number is positive which makes the machine a good investment. The Vice President should invest in the new machine. These calculations show us that even though the current machine is not very old and the cost of repairs is insignificant it is still better to invest in the newer machine since it can produce 2.5 times more trivets. What this case doesn’t take into account is the demand for trivets. The idea is to be able to sell all the extra trivets produced.

Year Cash Flow ($) Discount Factor at 15% Discounted Cash ($)...