Net Present Value Method and Present Value Index MVP Sports Equipment Company is

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 110 baseballs per hour to sewing 200 per hour. The contribution margin is $0.38 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 $24 per hour. The sewing machine will cost $193,400, have an eight-year life, and will operate for 1,400 hours per year. The packing machine will cost $106,000, have an eight-year life, and will operate for 1,200 hours per year. MVP seeks a minimum rate of return of 15% 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.)
SelectPacking MachineSewing Machine

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 4.192

Explanation / Answer

Conclusion:

Sewing machine should be selected as the NPV and the Profitability index are higher.

Sewing machine Increase in productivity 47880 Packing amchine Reduction in cost 28800 Compute the Net present value of Sewing machine Year Cash Flows Discount @15% Present value of cash flows 0 -193400 1 -193400 1 to 8 47880 5.018768 240298.6118 Net Present value 46898.61184 Compute the profitability index of the sewing machine Profitability index (240298.6118/193400) 1.242495407 (Present value of cash inflows/Outflows) Compute the Net present value of Packing machine Year Cash Flows Discount @15% Present value of cash flows 0 -106000 1 -106000 1 to 8 28800 5.018768 144540.5184 Net Present value 38540.5184 Compute the profitability index of the Packing machine Profitability index (144540.5184/106000) 1.363589796 (Present value of cash inflows/Outflows)

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