#6 Net Present Value Method and Present Value Index MVP Sports Equipment Company
ID: 2593428 • Letter: #
Question
#6
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 $28 per hour. The sewing machine will cost $282,400, have a seven-year life, and will operate for 1,400 hours per year. The packing machine will cost $134,900, have a seven-year life, and will operate for 1,200 hours per year. MVP seeks a minimum rate of return of 12% 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.)
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
Annual cash flows Sewing machine= (220-120)*0.5*1400= 70000 Annual cash flows Packing machine= 28*1200= 33600 a Sewing Machine Packing Machine Present value of annual net cash flows 319480 153350 Less amount to be invested 282400 134900 Net present value 37080 18450 b Sewing Machine Packing Machine Present value index 1.13 1.14 c Packing Machine
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