All-Star, Inc., is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 150 baseballs per hour to sewing 260 per hour. The contribution margin per unit is $0.54 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 $25 per hour. The sewing machine will cost $360,000, have an eight-year life, and will operate for 1,700 hours per year. The packing machine will cost $120,000, have an eight-year life, and will operate for 1,600 hours per year. All-Star seeks a minimum rate of return of 15% 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: |
$ |
$ |
| 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 All-Star 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