Net Present Value Method and Present Value Index Diamond & Turf Inc. is consider
ID: 2489841 • Letter: N
Question
Net Present Value Method and Present Value Index
Diamond & Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 150 baseballs per hour to sewing 290 per hour. The contribution margin per unit is $0.32 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 $21 per hour. The sewing machine will cost $260,000, have an eight-year life, and will operate for 1,800 hours per year. The packing machine will cost $85,000, have an eight-year life, and will operate for 1,400 hours per year. Diamond & Turf 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. Round 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
290-150 = 140 cash outflow 260000 packaging machine cash outflow 85000 sewing machine cash flow present value @15% presnt value of cash inflows years cash flow present value @15% presnt value of cash inflows 1 1800*140*0.32 80640 0.869565 70121.74 1 29400 0.869565 25565.22 2 80640 0.756144 60975.43 2 29400 0.756144 22230.62 3 80640 0.657516 53022.11 3 29400 0.657516 19330.98 4 80640 0.571753 46106.18 4 29400 0.571753 16809.55 5 80640 0.497177 40092.33 5 29400 0.497177 14617 6 80640 0.432328 34862.9 6 29400 0.432328 12710.43 7 80640 0.375937 30315.56 7 29400 0.375937 11052.55 8 80640 0.326902 26361.36 8 29400 0.326902 9610.912 present value of cash inflow 361857.6 present value of cash inflow 131927.3 cash outflow 260000 cash outflow 85000 NPV 101857.6 NPV 46927.25 present valueindex 1.39176 present valueindex 1.552085