LFRE 105 Lecture : Use of quel/qu'est-ce que
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Net Present Value Method and Present Value Index
MVP Sports Equipment Company is considering an investment in oneof two machines. The sewing machine will increase productivity fromsewing 140 baseballs per hour to sewing 250 per hour. Thecontribution margin is $0.54 per baseball. Assume that anyincreased production of baseballs can be sold. The second machineis an automatic packing machine for the golf ball line. The packingmachine will reduce packing labor cost. The labor cost saved isequivalent to $18 per hour. The sewing machine will cost $399,400,have a 10-year life, and will operate for 1,400 hours per year. Thepacking machine will cost $103,700, have a 10-year life, and willoperate for 1,200 hours per year. MVP seeks a minimum rate ofreturn of 12% on its investments.
Present Valueof 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 |
a. Determine the net present value for the twomachines. Use the table of present values of an annuity of $1above. Round to the nearest dollar.
SewingMachine | PackingMachine | |
Present value of annual net cashflows | $ | $ |
Less amount to be invested | $ | $ |
Net present value | $ | $ |
b. Determine the present value index for thetwo machines. If required, round your answers to two decimalplaces.
SewingMachine | PackingMachine | |
Present value index |
c. If MVP has sufficient funds for only one ofthe machines and qualitative factors are equal between the twomachines, in which machine should it invest? (If both present valueindexes are the same, either machine will grade as correct.)
SelectPacking MachineSewing MachineItem 9