Question

Ball Sports Inc. is considering an investment in one of two machines. The stitching machine will increase productivity from sewing 300 baseballs per hour to stitching 360 per hour. The contribution margin is $0.30 per baseball. Assume that any increased production of baseballs can be sold. The second machine applies a synthetic balata cover to golf balls. The golf ball machine will reduce labor cost. The labor cost saved is equivalent to $40 per hour. The stitching machine will cost $484,600, have an eight-year life, and will operate for 7,500 hours per year. The golf ball machine will cost $897,400, have an eight-year life, and will operate for 6,000 hours per year. Ball Sports Inc. seeks a minimum rate of return of 15% on its investments.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

a. Determine the net present value for the two machines. Use the table of present values of an annuity of $1 above.

	Stitching Machine		Golf Ball Machine
Present value of annual net cash flows	$ _____________		$ _____________
Less amount to be invested	$ _____________		$ ______________
Net present value	$121,145		$179,480

Answer 1

a
	Stitching Machine	Golf Ball Machine
Present value of annual net cash flows	605745	1076880
Less amount to be invested	484600	897400
Net present value	121145	179480
Workings:
Annual net cash flows:
Stitching Machine = (360-300)*7500*0.30= $135000
Golf Ball Machine = 40*6000= $240000
Present value of annual net cash flows:
Stitching Machine = 135000*4.487 = $605745
Golf Ball Machine = 240000*4.487 = $1076880