Reference no: EM133009893

Monty Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $ 104,000 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 $ 11,000 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 $ 99,000.

Martson Molders currently sells a molding machine that will allow Monty Pix to increase production and sales to 20,000 frames per year. The machine, which has a ten-year life, sells for $ 139,000 and would cost $ 13,000 per year to operate. Monty Pix's current machine costs only $ 8,000 per year to operate. If Monty 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. Monty Pix uses straight-line depreciation.

Problem 1: Calculate the new machine's net present value assuming a 16% discount rate.

Problem 2: Use Excel or a similar spreadsheet application to calculate the new machine's internal rate of return.

Problem 3: Calculate the new machine's payback period.