Net Present Value Method and Present Value Index MVP Sports Equipment Company is
ID: 2471986 • 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 180 baseballs per hour to sewing 320 per hour. The contribution margin is $0.42 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 $26 per hour. The sewing machine will cost $360,700, have a seven-year life, and will operate for 1,400 hours per year. The packing machine will cost $132,100, have a seven-year life, and will operate for 1,200 hours per year. MVP seeks a minimum rate of return of 10% 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 3.352 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 4.192 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. Sewing Machine Packing Machine Present value of annual net cash flows $ $ Less 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 Machine Packing Machine Present value index c. If MVP 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 indexes are the same, either machine will grade as correct.) SelectPacking MachineSewing Machine Check My Work (2 remaining) Icon Key Icon Key Previous Question 6 of 10 Next Exercise 26-13 (Algorithmic)
Explanation / Answer
1) First Investment plan in sewing machine
= Increase in Baseball Bat = 320 - 180 = 140 Bats per hour
= Annual Inflow due to investment = 140 X 0.42 X 1,400 = 82,320 per year
= PV for 7 years at 10% = 4.868
Net present value of Cash Inflow = $ 82,320 X 4.868 = $ 400,734
Net present value of investment = $ 360,700
Net present value of project = 400,734 - 360,700 = $ 40,034
2) First Investment plan in Packing machine
= Saving per Hour = $ 26
= Cash inflow due to saving = $ 26 X 1,200 = $ 31,200
= Pv of 10% for 7 years = 4.868
Net present vaue of Cash in flows = 31,200 X 4.868 = $ 151,882
Net present value of Investment = $ 132,100
Net present value of Project = $ 151,882 - $ 132,100 = $ 19,782
Its Better to go for sewing machine as it has High Net present value of project than Packing macine