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.
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.