Net Present Value Method and Present Value Index MVP Sports Equipment Company is
ID: 2462139 • Letter: N
Question
Net Present Value Method and Present Value Index
MVP Sports Equipment Company is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 140 baseballs per hour to sewing 250 per hour. The contribution margin is $0.40 per baseball. Assume that any increased 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 $25 per hour. The sewing machine will cost $198,100, have a six-year life, and will operate for 1,400 hours per year. The packing machine will cost $90,800, have a six-year life, and will operate for 1,200 hours per year. MVP seeks a minimum rate of return of 15% on its investments.
a. Determine the net present value for the two machines. Use the table of present values of an annuity of $1 above. Round to the nearest dollar.
b. Determine the present value index for the two machines. If required, round your answers to two decimal places.
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 3.352 2.991 6 4.917 4.355 4.111 3.784 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 4.192Explanation / Answer
MPV Sports Equipment Company a. Determination of netpresent value for two machines Sewing Machine Packing Machine Present value of annual net cash flows $ 2,33,094 $ 1,13,520 Less amount to be invested $ 1,98,100 $ 90,800 Net present value $ 34,994 $ 22,720 workings Present value of annual net cash flows Sewing Machine Packing Machine Per our increasecontribution margin/savings (250-140) x $ 0.4 $ 25 $ 44 $ 25 operating hours per year 1400 1200 Incremental net cash flows per year $ 61,600 $ 30,000 Life of the machine (in years) 6 6 Present value of an annuity of $ 1 at compund interest of 15% for 6 years (as given in the table) 3.784 3.784 Present value of net cash flows over 6 years life (C x E) $ 2,33,094 $ 1,13,520 a. Determination of present value of the index for the two machines Sewing Machine Packing Machine Present value index $ 233094 / $ 198100 $ 113520 / $ 90 800 1.18 1.25 Present value index (PI) = present value of net cashflows / initial investment