Net Present Value Method and Present Value Index MVP Sports Equipment Company is
ID: 2560104 • 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 150 baseballs per hour to sewing 270 per hour. The contribution margin is $0.44 per baseba 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 $18 per hour. The sewing machine will cost $289,700, have a six-year life, and will operate for 1,400 hours per year. The packing machine will cost $78,100, 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. Present Value of an Annuity of $1 at Compound Interest 1596 0.870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 4.772 5.019 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 6% 0.943 1.833 10% 0.909 1.736 2.673 2.487 2.402 Year 12% 0.893 1.690 3.465 3. 170 3.037 4.212 3.791 4.917 4.355 4.111 5.582 4.868 4.564 6.210 5.335 4.968 5.759 6.145 3.605 6.802 5.328 10 7.360 5.650 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 dollan, Sewing Machine Packing Machine Present value of annual net cash flows Less 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. 318,67 s289,70 O $32,221 $ 103,30 $78,100 $ 31,646 Sewing Machine Packing Machine Present value index 1.11 1.41 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.) Packing MachineExplanation / Answer
Present Value of Cash Inflow = PVAF of required rate * Cash Inflow
NPV = Present Value of Cash Inflows – Initial Cash Outflow
Cash inflow in Sewing Machine = (120 baseballs * 0.44) * 1400 hours per year
Cash inflow in Sewing Machine = $73,920
Cash saving in packing machine = $18/hr. * 1200 hours per year
Cash saving in packing machine = $21,600
Sewing machine
Packing Machine
Initial Cash Outflow
$289,700
$78,100
Useful Life
6 Years
6 Years
Hours per Year
1,400
1,200
PVAF@10% for 6 Years
4.355
4.355
Cash Inflow per year
73,920
21,600
Present Value of Cash Inflow
321,922
(73,920 * 4.355)
94,068
(21,600 * 4.355)
NPV
32,222
15,968
(b) As we can see that Sewing Machine P.I. is correct so we will calculate only of packing machine
P.I. = PV of cash inflows / Initial Cash outflow
= 94,068 / 78,100
P.I of Packing machine = 1.21
C part is correct so there is no need to calculate that
Sewing machine
Packing Machine
Initial Cash Outflow
$289,700
$78,100
Useful Life
6 Years
6 Years
Hours per Year
1,400
1,200
PVAF@10% for 6 Years
4.355
4.355
Cash Inflow per year
73,920
21,600
Present Value of Cash Inflow
321,922
(73,920 * 4.355)
94,068
(21,600 * 4.355)
NPV
32,222
15,968
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