Question

MVP Sports Equipment Company is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 160 baseballs per hour to sewing 288 per hour. The contribution margin is $0.48 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 $269,800, have a five-year life, and will operate for 1,400 hours per year. The packing machine will cost $87,200, have a five-year life, and will operate for 1,200 hours per year. MVP seeks a minimum rate of return of 12% on its investments.

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	3.353	2.991
6	4.917	4.355	4.111	3.785	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

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

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 $ $ 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. Sewing Machine Packing Machine Present value index

Answer 1

a.
Annual net cash flow of Sewing Machine
Incremental Production per hour (288 - 160)	128
Contribution Margin per baseball	$0.48
Annual hours of machine operations	1400	hours
Annual net cash flow = 128 * $0.48 * 1400	$86,016
Annual net cash flow of packing Machine
Labor cost saved per hour	$24	per hour
Annual hours of machine operations	1200	hours
Annual net cash flow = $24 * 1200	$28,800
	Sewing Machine	Packing Machine
Annual net cash flow	$86,016	$28,800
Present value of an annuity of $1 at 12% for 5 years	3.605	3.605
Present value of annual net cash flows (Annual cash flow *  PVA @12% for 5 years	$310,088	$103,824
Less: Amount to be invested	-$269,800	-$87,200
Net present value	$40,288	$16,624
b.
Present value index = Present Value of Net Cash Flows / Amount to be invested
Present value index of the sewing machine $310,088 / $269,800	1.14
Present value index of the packing machine $103,824 / $87,200	1.19