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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 $0.36 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 $18 per hour. The sewing machine will cost $190,300, have a live- year life, and will operate for 1,400 hours per year. The packing machine will cost $68,000, have a five-year life, and will operate for 1,200 hours per year. Diamond and Turf seeks a minimum rate of return of 10% 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 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 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 6.802 9 5.759 5.328 4.772 4.031 10 4.192 7.360 -5.650 6.145 5.019 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 3 4 5 6 4-020 1:320 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 6 4.917 4.355 4.111 3.785 3.326 7 5.582 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 i 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 c. If Diamond and 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.) 3 4 5 Net Present Value Method, Present Value Indes, and Analysis for a service company Continental Railroad Company is evaluating three capital investment proposals by uning the net present value method. Relevant data related to the proposals a und follows: Maintenance Computer Ramp Facilities Equipment Network Amount to be invested $691,384 $478,691 $215,220 Annual net cash flows: Year 1 284,000 204,000 122,000 Year 2 264,000 164,000 64,000 Year 3 241,000 163,000 61,000 Present Value of $1 at Compound Interest 6% 10% 12% 15% 20% 0.943 0,909 0.893 0.870 0.833 0.890 0.826 0,797 0.756 0.694 0.640 0.751 0.712 0.658 0.579 0.792 0,683 0.636 0.572 0.462 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0335 0.065 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 Year 1 2 3 4 6 7 0.627 0.467 0.404 0.327 0.233 19 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 Required: 1. Assuming that the desired rate of return is 6%, prepare a net present value analysis for each proposal. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar. Ramp Facilities Computer Network Maintenance Equipment 267,812 X Present value of net cash flow total X X Amount to be invested X 234,960 X X Net present value X X 2. Determine a present value index for each proposal. If required, round your answers to two decimal places. Present Value Index Maintenance Equipment X Ramp Facilities X Computer Network X 3. The X has the largest present value index. Although X has the largest net present value, it returns less present value per dollar invested than does the X is less than 1, indicating that it does not meet the minimum rate of return standard. X X, as revealed by the present value indexes. The present value index for the