Diamond and Turf Inc. is considering an investment in one of two machines. The s
ID: 2526425 • Letter: D
Question
Diamond and Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 180 baseballs per hour to sewing 324 per hour. The contribution margin per unit is $0.4 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 $396,400, have a 10-year life, and will operate for 1,400 hours per year. The packing machine will cost $153,400, have a 10-year life, and will operate for 1,200 hours per year. Diamond and Turf seeks a minimum rate of return of 12% on its investments.
Present Value of an Annuity of $1 at Compound Interest 6% 0.943 1.833 1096 0.909 1.736 15% 870 1.626 20% 0.833 1.528 12% 0.893 1.690 2.673 2.7 2.402 2.283 2.106 3.037 4.212 3.791 3.605 3.353 2.991 Year 3.465 3.170 2.855 2.589 4.917 4.355 5.582 4.868 6.210 6.802 7.360 6.145 3.326 3.605 3.837 4.031 4.192 3.785 4.564 335 4.968 4.487 5.328 5.650 4.160 9 5.759 4.772 5.019 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 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 Diamond and Turf 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.)Explanation / Answer
Annual cash inflows: Sewing machine: Initial production rate per hour 180 Rate per hour after installation 324 Increase in production per hour 144 Number of hours machine annually 1400 Increase in production per annum 201,600 Contribution margin per machine 0.40 Annual cash inflows: 80,640 Packing Machine: Savings in labour cost epr hour 26 Numbers of hours machine operate in year 1200 Annual Savings in Labour cost 31200 Req a: NET PRESENT VALUE Sewing Packing Present value of Cash inflows 455616 176280 (Annuity factor at 12% for 10 years i.e. 5.65) Less: Initial Investment 396400 153400 Net Present value 59216 22880 Req B: PROFITABILITY INDEX Sewing Packing Present value of Cash inflows 455616 176280 (Annuity factor at 12% for 10 years i.e. 5.65) Initial Investment 396400 153400 Profitability Index 1.1494 1.1492 Req C: Sewing machine must be accepted.
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