Net Present Value Method and Present Value Index Diamond and Turf Inc. is consid
ID: 2580656 • Letter: N
Question
Net Present Value Method and Present Value Index
Diamond and Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 140 baseballs per hour to sewing 252 per hour. The contribution margin per unit 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 $335,900, have a 10-year life, and will operate for 1,400 hours per year. The packing machine will cost $164,900, have a 10-year life, and will operate for 1,200 hours per year. Diamond and Turf seeks a minimum rate of return of 10% 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 3.353 2.991 6 4.917 4.355 4.111 3.785 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
a) Sewing Machine Packing Machine Present value of annual net cash flows 404657 197711 Amount to be invested 335900 164900 Net present value 68757 32811 WN 1 - Present value of annual net cash flows Sewing Machine Increase in contribution margin = (252-140)*1400*$0.42 = $65856 PV of Increase in contribution margin = $65856*PVIFA @ 10% 10 years = $404657 = $65856*6.1446 = $404657 Packing Machine Savings in labour costs = $26*1200 = $31200 PV of Savings in labour costs = $31200*PVIFA @ 10% 10 years = $31200*6.1446 = $197711 b) Present value index = PV of total cash inflow / PV of cash outflow Sewing Machine Packing Machine Present value index 1.20 1.20 ($404657/$335900) (197711/164900)