Reference no: EM133087824
Question - Martinez 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 $10,000 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 Martinez 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 $15,000 per year to operate. Martinez Pix's current machine costs only $8,000 per year to operate. If Martinez 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. Martinez Pix uses straight-line depreciation.
Required -
(a) Calculate the new machine's net present value assuming a 16% discount rate.
(b) Use Excel or a similar spreadsheet application to calculate the new machine's internal rate of return.
(c) Calculate the new machine's payback period.
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