Blue Spruce Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $97,000 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 $11,000 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 $94,500. Martson Molders currently sells a molding machine that will allow Blue Spruce Pix to increase production and sales to 20,000 frames per year. The machine, which has a ten-year life, sells for $132,000 and would cost $15,000 per year to operate. Blue Spruce Pix's current machine costs only $8,000 per year to operate. If Blue Spruce 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. Blue Spruce Pix uses straight-line depreciation.
Blue Spruce Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $97,000 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 $11,000 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 $94,500. Martson Molders currently sells a molding machine that will allow Blue Spruce Pix to increase production and sales to 20,000 frames per year. The machine, which has a ten-year life, sells for $132,000 and would cost $15,000 per year to operate. Blue Spruce Pix's current machine costs only $8,000 per year to operate. If Blue Spruce 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. Blue Spruce Pix uses straight-line depreciation.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
83.
Subject : - Finance
Transcribed Image Text:Blue Spruce Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $97,000 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
$11,000 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 $94,500.
Martson Molders currently sells a molding machine that will allow Blue Spruce Pix to increase production and sales to 20,000 frames
per year. The machine, which has a ten-year life, sells for $132,000 and would cost $15,000 per year to operate. Blue Spruce Pix's
current machine costs only $8,000 per year to operate. If Blue Spruce 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. Blue Spruce
Pix uses straight-line depreciation.
Click here to view the factor table.
(a)
Calculate the new machine's net present value assuming a 16% discount rate. (For calculation purposes, use 4 decimal places as
displayed in the factor table provided and round final answer to O decimal place, e.g. 58,971.)
Net present value $
Transcribed Image Text:* Your answer is incorrect.
Use Excel or a similar spreadsheet application to calculate the new machine's internal rate of return. (Round answer to 2 decimal
places, e.g. 1.25%.)
(c)
Internal rate of return
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19.81
Payback period
Calculate the new machine's payback period. (Round answer to 2 decimal places, e.g. 1.25.)
%
years
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