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Net Present Value MethodandPresent Value Index

Diamond & 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 290 per hour. The contribution margin per unit is $0.32 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 $21 per hour. The sewing machine will cost $260,000, have an eight-year life, and will operate for 1,800 hours per year. The packing machine will cost $85,000, have an eight-year life, and will operate for 1,400 hours per year. Diamond & Turf seeks a minimum rate of return of 15% on its investments.

Present Value of an Annuityof $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. Round to two decimal places.

	Sewing Machine	Packing Machine
Present value index

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? SelectPacking MachineSewing MachineItem 9

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a. First determine the annual net cash flow for each machine. For the sewing machine, multiply the hours by the incremental baseballs by the contribution margin per baseball. For the packing machine, multiply the hours by the labor cost saved. Next, multiply the annual net cash flow for each machine by the present value of an annuity factor for 8 periods at 15%,Exhibit 2. Subtract the amount to be invested.

b. Divide the total present value of the net cash flow by the amount to be invested.

c. What does the present value index indicate about the net present value?