Net Present Value Method and Present Value Index MVP Sports Equipment Company is
ID: 2500380 • 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 120 baseballs per hour to sewing 220 per hour. The contribution margin is $0.52 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 $275,800, have a six-year life, and will operate for 1,400 hours per year. The packing machine will cost $112,800, have a six-year life, and will operate for 1,200 hours per year. MVP 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 3.352 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
No of Hours Sewing machine would operate 1400 hours per year Life of machine 6 years Net present Value of the Sewing machines years 1 2 3 4 5 6 Total Net Cash Flow 160160 160160 160160 160160 160160 160160 PV @ 10% 0.909 0.826 0.751 0.683 0.621 0.564 PV of net cash flow 145585 132364 120331 109391 99447 90406 697524 Less: Amount invested 275800 Net Present Value 421724 No of Hours Packing machine would operate 1200 hours per year Life of machine 6 years Net present Value of the Sewing machines years 1 2 3 4 5 6 Total Net Cash Flow 31200 31200 31200 31200 31200 31200 PV @ 10% 0.909 0.826 0.751 0.683 0.621 0.564 PV of net cash flow 28361 25785 23441 21310 19373 17612 135881 Less: Amount invested 112800 Net Present Value 23081 (a) Net Present Value Sewing machine Packing Machine Present vlaue of the cash flow 697524 135881 Less: Amount invested 275800 112800 Net present value 421724 23081 (b) Present Index Sewing machine Packing Machine Net present value 421724 23081 Intital Invested Amount 275800 112800 Present index Value (NPV/Amount Invested) 1.53 0.20
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