Net Present Value Method and Present Value Index MVP Sports Equipment Company is
ID: 2497048 • 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 160 baseballs per hour to sewing 290 per hour. The contribution margin is $0.44 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 $361,700, have a 10-year life, and will operate for 1,400 hours per year. The packing machine will cost $125,300, have a 10-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.
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 MachineItem 9
Explanation / Answer
Sewing machine:
cash flow per year=(290-160)*1400*0.44=$800,80
Present value of cah flow=80080*(PV of annuity at 15% and 10yr)
=80080*5.019=$401921.5
Less amount of invested=$361,700
Net present value=401,921.5-361,700=$40,221.5
Packing machine:
cash flow per year=26*1200=$31,200
Present value of cah flow=31,200*(PV of annuity at 15% and 10yr)
=31200*5.019=$156,592.8
Less amount of invested=$125,300
Net present value=156,592.8-125,300=$31,293
Present value index:
Sewing machine=40221.5/361700=0.11
Packaging Machine=31293/125300=0.25
c)It should invest in Packaging machine.