Jewel Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $85,000

Question:

Jewel Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $85,000 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 $15,000 overhaul in three years. More importantly, it does not provide enough capacity to meet customer demand.

The company currently produces and sells 10,000 frames per year, generating a total contribution margin of $50,000. Martson Molders currently sells a molding machine that will allow Jewel Pix to increase production and sales to 15,000 frames per year. The machine, which has a ten-year life, sells for $125,000 and would cost $9,000 per year to operate. Jewel Pix's current machine costs only $7,000 per year to operate. If Jewel Pix purchases the new machine, the old machine could be sold at its book value of $4,000. The new machine is expected to have a salvage value of $9,000 at the end of its ten-year life. Jewel Pix uses straight-line depreciation.

Required

a. Calculate the new machine's net present value assuming a 14% 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.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes... Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...