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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Net present value method and present value index

Ball Sports Inc. is considering an investment in one of two machines. The stitching machinewillincrease productivity from sewing 300 baseballs per hour to stitching 360 per hour. Thecontribution margin is $030 per baseball. Assume that any increased production of baseballs in be sold. The second machine applies a synthetic balata cover to golf balls. The golf ballmachine will reduce labor cost. The labor cost saved is equivalent to $40 per hour. The stitchingmachine 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, ha an eight-year life, and will operate for 6,000hours per year. Ball Sports Inc. seeks a minimum rate of return of 15% on its investments.

a. Determine the net present value for the two machines. Use the table of present values ofan 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 factorsare equal between the two machines, in which machine should it invest?

To determine

(a)

Concept introduction:

Net present value method:

It is a method of determining the present value of cash flows over the period by the multiplying the cash flows with the discounting factor of the required rate.

To compute:

The net present value for stitching machine and golf ball machine.

Explanation

        B.S. Inc.

    ParticularsStitching MachineGolf Ball Machine
    Cash inflow i.e. total savings  $135,000(60×$0.30×7500)  $240,000($40×6000)
    Annuity factor at   15%  4.487  4

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