Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

MVP Sports Equipment Company is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 130 baseballs per hour

MVP Sports Equipment Company is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 130 baseballs per hour to sewing 230 per hour. The contribution margin is $0.40 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 $265,800, have a 10-year life, and will operate for 1,400 hours per year. The packing machine will cost $153,800, have a 10-year life, and will operate for 1,200 hours per year. MVP 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 3.352 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 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 $ $
Less 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

c. If MVP 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.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing

Authors: Alan Millichamp, John Taylor

12th Edition

1473778999, 9781473778993

More Books

Students also viewed these Accounting questions

Question

Distinguish between recruitment sources and recruitment methods.

Answered: 1 week ago

Question

How has social media emerged as an important force in recruiting?

Answered: 1 week ago

Question

5.5 Summarize external recruitment methods.

Answered: 1 week ago