Net
present value method and present value index
Diamond and Turf Inc. is considering an investment in one f
two machines. The sewing machine will increase productivity from
sewing 130 baseballs per hour to sewing 234 per hour. The
contribution margin per unit is $0.42 per basebal. Assume that any
increase production of baseballs can be sold. The second machine is
an automatic packing machine for the golf ball line. The packing
machine will reduce packing labor cost. The labor cost saved is
equivalent to $19 per hour. The sewing machine will cost $221,200,
have a six-year life, and will operate for 1,400 hours per year.
The packing machine will cost $77,800, have a six-year life, and
will operate for 1,200 hours per year. Diamond and Turf seeks a
minimum rate of return of 12% on its investment.
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 value of an annuity of $1 above. Round to the
nearest dollar.
Sewing Machine. Packing Machine
Present value of annual net cash flows. $. $
Amount to be invested. $. $
Net present value. $. $
b. Determine the present value index for the two machines. If
required, round your answers to two decimal places.
Sewing Machines. Packing Machine
Present value index. ? ?
c. If Diamond and Turf has sufficient funds for only one of
the machines and qualitative factors are equal between the two
machines, in which machine should it invest? ( If both present
value index are the same, either machine will grade as
correct.)
Packing Machine or Sewing Machine?