Suppose you own a specialized auto parts manufacturer. You purchase and have installed a new machine to make a particular type of part. The price of the machine plus installation is $300,000. Once the machine is purchased and installed it has no resale value, but it does not wear out. Other costs of making the parts are $200 per unit.
Suppose you are able to make and sell 1000 units at $225 each. Let the market rate of interest be 10%.
(a) If you have already purchased the machine, should you go ahead and make and sell the 1000 units or should you close your operation?
(b) If you have not yet purchased the machine and anticipate selling only 1000 at a price of $225, should purchase the machine and produce?
(c) Is there a difference in your answers to (a) and (b)? Explain.