Question

Diamond and Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 130 baseballs per hour to sewing 234 per hour. The contribution margin per unit is $0.44 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 $19 per hour. The sewing machine will cost $196,300, have a five-year life, and will operate for 1,400 hours per year. The packing machine will cost $68,200, have a five-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 Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 1.833 1.736 1.690 1.626 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 4.212 3.791 3.605 3.353 2.991 4.917 4.355 4.111 3.785 3.326 5.582 4.868 4.564 4.160 3.605 6.210 5.335 4.968 4.487 3.837 6.802 5.759 5.328 4.772 4.031 7.360 6.145 5.650 5.019 4.192

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

Answer 1

Annual Increase in Contribution 22,800 Sewing Machine Packing Machine 64,064 $ [(234 base ball - 130 Baseball) *$0.44*1400 Hours ($19 per hour *1200 hours) 3.605 PVA Factor (5 Years,12%) 3.605 Present Value Of Annual Cash Flow (a*b) $ 2,30,951 $ 82,194 Amount To be Invested 1,96,300 $ 68,200 Net Present Value (c-d) 34,651 $ 13,994 Present Value Index (c/d) 1.18 1.21