Question
a. Diamond and Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 140 baseballs per
a. Diamond and Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 140 baseballs per hour to sewing 252 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 $22 per hour. The sewing machine will cost $266,100, have a seven-year life, and will operate for 1,400 hours per year. The packing machine will cost $105,400, have a seven-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 |
| 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 |
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 1 | $fill in the blank 2 |
| Amount to be invested | $fill in the blank 3 | $fill in the blank 4 |
| Net present value | $fill in the blank 5 | $fill in the blank 6 |
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 |
b. The following data are accumulated by Lone Peak Inc. in evaluating two competing capital investment proposals:
| 3D Printer | Truck | ||||
| Amount of investment | $52,000 | $84,000 | |||
| Useful life | 4 years | 7 years | |||
| Estimated residual value | 0 | 0 | |||
| Estimated total income over the useful life | $7,800 | $36,750 | |||
Determine the expected average rate of return for each proposal. If required, round your answers to one decimal place.
| 3D Printer | fill in the blank 1% |
| Truck | fill in the blank 2% |
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Managerial Accounting
Authors: Peter Clarke
2nd Edition
9781907214240
