Reference no: EM133002392
Question - Riverbed Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $109,000 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 $12,000 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 $106,500. Martson Molders currently sells a molding machine that will allow Riverbed Pix to increase production and sales to 20,000 frames per year.
The machine, which has a ten-year life, sells for $144,000 and would cost $16,000 per year to operate. Riverbed Pix's current machine costs only $8,000 per year to operate. If Riverbed 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. Riverbed Pix uses straight-line depreciation.
Required -
1- Calculate the new machine's net present value assuming a 16% discount rate.
2- Use Excel or a similar spreadsheet application to calculate the new machine's internal rate of return.
3- Calculate the new machine's payback period.
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