Question

Net Present Value Method and Present Value Index

Diamond and Turf Inc. 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 per unit is $0.42 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 $27 per hour. The sewing machine will cost $216,200, have a five-year life, and will operate for 1,400 hours per year. The packing machine will cost $98,100, 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%
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 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

A Diamond & Tus Inc sewing packing machine machine present value of Annual Net cash flows, 254, 364 116,802 Amount to be invested! (216200) (98100) Net present value $38169 18702 present value Index sewing machine packing machine 118 1.19 Explanation: @ Annual Net cash flow- sewing machine 1400 HOUY X [ 20 baseball - 150 baseball 7 X $0.42 70560 = TPVOA of & I table (N=5; I = 12%] =) 3.605 PV of Annyal Net cash frow : = $ 70560 X 3.605 254.3691

TH Annual Net cash flow Packing machine 1200 Hour & 27 labor cost saved pes Hour $ 32,400) - PV OF Annuces Net cash flow : = $ 32400X 3.605 - Is 116,8027 (6) present volue Index: TOTOY present volue of net cash flow. Amount to be invested & sewing machine: $ 254369 & 216200 = 11-18 & Packing machine $ 116802 = 98100 - 11.19