Question

Net present value method and present value index Diamond and Turf Inc. is considering an investment...

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?

Homework Answers

Answer #1
a
Sewing Machine Packing Machine
Present value of annual net cash flows 251396 93731
Amount to be invested 221200 77800
Net present value 30196 15931
b Sewing Machine Packing Machine
Present value index 1.14 1.20
c
Packing Machine should be selected
Workings:
Annual cash flows Sewing Machine = (234-130)*0.42*1400= $61152
Annual cash flows Packing Machine = 19*1200= $22800
Sewing Machine Packing Machine
Annual cash flows 61152 22800
X PV factor @ 12% 4.111 4.111
Present value of annual net cash flows 251396 93731
Present value of annual net cash flows 251396 93731
Divided by Amount to be invested 221200 77800
Present value index 1.14 1.20
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