MVP Sports Equipment Company is considering an investment in one of two machines

Question

MVP Sports Equipment Company is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 150 baseballs per hour to sewing 270 per hour. The contribution margin is dollar0.50 per baseball. As increased production of baseballs con 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 dollar28 per hour. The sewing machine dollar343,500, have a seven-year life, and will operate for 1,400 hours per year. The pocking machine will cost dollar139,000, have a seven-year life, and will operate for 1,200 hours per year. MVP seeks a minimum rate of return of 10% on its investment Determine the net present value for the two machines. Use the table of present values of on annuity of dollar1 above. Round to the nearest dollar. Determine the net present value for the two machines. If required, round your answers to two decimal places. If MVP hat 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

Calculation of Present value :

b. Presnt value index = Net present value/Initial investment

So,

For sewing machine = 65412/343500 =0.19

For packing machine = 24564.80/139000 = 0.18

c. As the present value index of sewing machine is more. So sewing machine should be purchased

Sewing machine Cash flows Amount Discounting factor Present value Cash flows due to increase in produtivity (270-150)*1400hrs*$0.50 =$84000 4.868 408912 Less: Amount invested 343500 Net present value 65412 Packing machine Cash flows due to saving in labor cost 1200hrs*$28 =$33600 4.868 163564.8 Less: Amount invested 139000 Net present value 24564.80

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