9-28 Net present value, internal rate of return, payback period (LO 3. Jewel Pix

Question

9-28 Net present value, internal rate of return, payback period (LO 3. Jewel Pix currently uses a six-year-old molding machine to manufacture silver picture tra The company paid $85,000 for the machine, which was state of the art at the time of Pul ill need a $15,000 over tomer haul in three years. More important, it does not provide enough capacity to meet cus 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 year the old machine could be sold at its book value of $4,000. The new machine is expecte to have a salvage value of $9,000 at the end of its ten-year life. Jewel Pix uses straight-lin 006 per year to operate. If Jewel Pix purchases the new machine depreciation

Explanation / Answer

for purcahing a new machine we will have to sell old machine at its book value of 7000.

new mahchine making frames per year = 15000

Contribution margin of old machine = 50000/10000 = 5

new machine contribution margin will remain same as per year operate cost is based on period basis that;s why assume fixed.

so contribution margin per unit = 5*15000 = 75000

Cashoutflow initially = new machine cost - old machine sells value

= 125000 - 4000 = 121000

expected life of new machine = 10 years

per year operate cost = 9000

Compuation of Net present value @14% discounting rate -

By using excel Computatio of IRR -

Formula used =IRR(all cash flows)

Computation of Payback period -

Payback period will be between 1 and 2 years

so payback period = 2 - (132000 -121000)/66000*12

= 2 years - 2months

= 1 year and 10 months

Note - Cash flow will remain same as tax rate is not given.

In case of further explanation required please comment.

t

Year 0 1 2 3 4 5 6 7 8 9 10 NPV Purcahse price of new machine -125000 Old machine sold 4000 Contribution margin 75000 75000 75000 75000 75000 75000 75000 75000 75000 75000 per year operation cost 9000 9000 9000 9000 9000 9000 9000 9000 9000 9000 Slavage value 9000 Cash inflow as tax rate not give -121000 66000 66000 66000 66000 66000 66000 66000 66000 66000 75000 Discount Rate @14% 1 0.877193 0.769468 0.674972 0.59208 0.519369 0.455587 0.399637 0.350559 0.307508 0.269744 Present value @14% -121000 57894.74 50784.86 44548.12 39077.3 34278.33 30068.71 26376.06 23136.9 20295.52 20230.79 225691.3

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