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Determine the present value index for the two machines

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Problem - Net present value method and present value index

Ball Sports Inc. is considering an investment in one of two machines. The stitching machine will increase productivity from sewing 300 baseballs per hour to stitching 360 per hour. The contribution margin is $0.30 per baseball. Assume that any increased production of baseballs can be sold. The second machine applies a synthetic balata cover to golf balls. The golf ball machine will reduce labor cost. The labor cost saved is equivalent to $40 per hour. The stitching machine will cost $484,600, have an eight-year life, and will operate for 7,500 hours per year. The golf ball machine will cost $897,400, have an eight-year life, and will operate for 6,000 hours per year. Ball Sports Inc. seeks a minimum rate of return of 15% on its investments.

Required -

a. Determine the net present value for the two machines. Use the table of present values of an annuity of $1 in the chapter. Round to the nearest dollar.

b. Determine the present value index for the two machines. Round to two decimal places.

c. If Ball Sports Inc. has sufficient funds for only one of the machines and qualitative factors are equal between the two machines, in which machine should it invest?

Reference no: EM132706976

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