Qusetion: You operate a carpeting and home textile manufacturing business: Red Carpet Thready Co. Answer the following questions about your firm's operations.
1. One of your textile machines has just broken down. You have two options:
a. Repair the machine. This will cost you $35,000. The repaired machine will produce 800 units per year valued at $200 each for the next 5 years (including this year).
b. Replace the machine with a better model. The new machine requires calibration with the rest of your production system. This will cost you $60,000 immediately (for the machine), plus a $10,000 calibration cost paid next year. The new machine will produce 500 units in the first year (this year, until the kinks are worked out), then 950 units per year valued at $200 each for the 4 years after that.
The interest rate is currently 4% and you expect it to be fixed at this level for the next 5 years. Which option is the better option for the firm? Compute the NPV of each option to justify your answer.
2. You monitor the carpet market closely.
a. Using the supply-demand model, identify what happens to the equilibrium price and quantity traded in the carpet market when the following events occur. Briefly add how your firm might respond to the new conditions (keep your statement very short). You can draw the diagram by hand and upload photos of your work to save time:
i. Prices of vinyl flooring and hardwood flooring decrease.
ii. The price of nylon, an input used in carpet manufacturing, rises.
3. Your firm has recently received an order for 500 units priced at $200 each from a distributor in Toronto (Canada). To fill the order, you have two options:
a. Import polyester from a supplier in Monterrey (Mexico) to your manufacturing plant in Nashville (USA). Transform the polyester into carpet (1 unit of polyester = 1 unit of carpet), then transport the carpet to Toronto. Doing this comes at the following costs:
i. Price of polyester from your Mexican supplier: 500 MEX (pesos) per unit.
ii. Transportation costs from Monterrey to Laredo (Texas): 38,000 MEX (pesos).
iii. Transportation costs from Laredo to Nashville: 3,000 USD (dollars).
iv. Transportation costs from Nashville to Detroit (Michigan): 1,000 USD (dollars).
v. Transportation costs from Detroit to Toronto: 1, 100 CAD (Canadian dollars).
b. Import polyester from a supplier in Toronto to your manufacturing plant in Nashville. Transform the polyester into carpet (1 unit of polyester = 1 unit of carpet), then transport the output back to Toronto. Doing this comes at the following costs:
i. Price of polyester from your Canadian supplier: 50 CAD (Canadian dollars) per unit.
ii. Transportation costs from Toronto to Detroit: 1, 100 CAD (Canadian dollars)
iii. Transportation costs from Detroit to Nashville: 1,000 USD (dollars).
iv. Transportation costs from Nashville to Detroit: 1,000 USD (dollars).
v. Transportation costs from Detroit to Toronto: 1, 100 CAD (Canadian dollars).
Assume the USD-MEX exchange rate is 1 USD = 19 MEX and the USD-CAD exchange rate is 1 USD = 1.24 CAD. Also assume it costs $10/unit to transform the polyester into carpet at your Nashville plant and there are no other associated costs. Which option is the best option? Compute total profits in US dollars for each option to justify your result.