Problem
Bridgeport Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $ 95,000 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 9,000 frames per year, generating a total contribution margin of $ 93,000.
Martson Molders currently sells a molding machine that will allow Bridgeport Pix to increase production and sales to 12,000 frames per year. The machine, which has a ten-year life, sells for $ 133,000 and would cost $ 14,000 per year to operate. Bridgeport Pix's current machine costs only $8,000 per year to operate. If Bridgeport 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 $ 19,700 at the end of its ten-year life. Bridgeport Pix uses straight-line depreciation.
i. Calculate the new machine's net present value assuming a 14% discount rate.
ii. Calculate the new machine's payback period.
iii. Calculate the new machine's internal rate of return.