Net Present Value Method and Present Value IndexDiamond & Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 120 baseballs per hour to sewing 216 per hour. The contribution margin per unit is $0.52 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 $26 per hour. The sewing machine will cost $351,400, will have a 10-year life, and will operate for 1,400 hours per year. The packing machine will cost $148,100, will have a 10-year life, and will operate for 1,200 hours per year. Diamond & Turf seeks a minimum rate of return of 12% on its investments.Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83321.8331.7361.6901.6261.52832.6732.4872.4022.2832.10643.4653.1703.0372.8552.58954.2123.7913.6053.3532.99164.9174.3554.1113.7853.32675.5824.8684.5644.1603.60586.2105.3354.9684.4873.83796.8025.7595.3284.7724.031107.3606.1455.6505.0194.192a. Determine the net present value for the two machines. Use the table of present values of an annuity of $1 above. Round to the nearest dollar. Sewing MachinePacking MachinePresent value of annual net cash flows$fill in the blank$fill in the blankLess amount to be invested$fill in the blank$fill in the blankNet present value$fill in the blank$fill in the blankb. Determine the present value index for the two machines. If required, round your answers to two decimal places. Sewing MachinePacking MachinePresent value indexfill in the blankfill in the blankc. If Diamond & Turf 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.)

Net present value is a discounted cash flow approach for evaluating capital investments that takes into account the time value of money. Cash flows across the life of an investment, and it is thought that a rupee of cash flow in the first year of investment is worth more than a rupee of cash flow in the second year.a Annual cash inflows - Sewing machine = 1800*140*$0.32 = $80,640 Annual cash inflows - Packing machine = 1400*$21 = $29,400 Computation of NPV Sewing Machine Packing Machine Particulars Period PV Factor (15%) Amount Present Value Amount Present Value Cash outflows: Initial investment 0 1 $260,000 $260,000 $85,000 $85,000 Present Value of Cash outflows (A) $260,000 $85,000 Cash Inflows Annual cash inflows 1-8 4.487 $80,640 $361,832 $29,400 $131,918 Present Value of Cash Inflows (B) $361,832 $131,918 Net Present Value (NPV) (B-A) $101,832 $46,918 b Present Value Index Particulars Sewing Machine Packing Machine Present value of cash inflows $361,832 $131,918 Initial investment $260,000 $85,000 Present value index ( PV of cash inflows/Initial investment) 1.39 1.55c The present value index is used to rate proposals when a corporation has limited money for capital investment and the proposals entail diverse assets. The present value index informs decision-makers about the current worth of return on investment per dollar invested. As a result, D and T should invest in a packing machine rather than a sewing machine since the present value index is higher for packing machines.

Answered: sed production of baseballs can be…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Net Present Value Method and Present Value Index

Diamond & Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 120 baseballs per hour to sewing 216 per hour. The contribution margin per unit is $0.52 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 $26 per hour. The sewing machine will cost $351,400, will have a 10-year life, and will operate for 1,400 hours per year. The packing machine will cost $148,100, will have a 10-year life, and will operate for 1,200 hours per year. Diamond & 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	$fill in the blank	$fill in the blank
Less amount to be invested	$fill in the blank	$fill in the blank
Net present value	$fill in the blank	$fill in the blank

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	fill in the blank	fill in the blank

c. If Diamond & Turf 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.)

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