Reference no: EM132992234

Grouper Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $87,000 for the machine, which was state of the art at the time of purchase. Although the machine will likely last another ten years, it will need a $9,000 overhaul in four years. More important, it does not provide enough capacity to meet customer demand. The company currently produces and sells 15,000 frames per year, generating a total contribution margin of $84,000.

Martson Molders currently sells a molding machine that will allow Grouper Pix to increase production and sales to 20,000 frames per year. The machine, which has a ten-year life, sells for $122,000 and would cost $14,000 per year to operate. Grouper Pix's current machine costs only $8,000 per year to operate. If Grouper Pix purchases the new machine, the old machine could be sold at its book value of $5,000. The new machine is expected to have a salvage value of $20,000 at the end of its ten-year life. Grouper Pix uses straight-line depreciation.

Problem 1: Calculate the new machine's net present value assuming a 11% discount rate.

Problem 2: Calculate the new machine's internal rate of return.