Net Present Value Method and Present Value Index MVP Sports Equipment Company is
ID: 2473086 • 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
Explanation / Answer
a. Net Present value of two machines
Sewing Machine
Year
Cash Flow
PVAF @ 10%
Discounted cash flow
0
(360,700)
1
(360,700)
1 to 7
105,840
4.868
515,229
NPV
154,529
Packing Machine
Year
Cash Flow
PVAF @ 10%
Discounted cash flow
0
(132,100)
1
(132,100)
1 to 7
31,200
4.868
151,882
NPV
19,782
b. Present value Index Calculation:
Present value index (Profitability Index) = Present value of future cash flow / Initial Investment
Sewing Machine
Present value Index = $515,229 / $360,700
Present value Index = 1.43
Packing Machine
Present value Index = $151,882 / $132,100
Present value Index = 1.15
C. Select Sewing Machine, because it will give maximum return from investment
a. Net Present value of two machines
Sewing Machine
Year
Cash Flow
PVAF @ 10%
Discounted cash flow
0
(360,700)
1
(360,700)
1 to 7
105,840
4.868
515,229
NPV
154,529
Packing Machine
Year
Cash Flow
PVAF @ 10%
Discounted cash flow
0
(132,100)
1
(132,100)
1 to 7
31,200
4.868
151,882
NPV
19,782