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Net present value method and present 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, will have an eight-year life, and will operate for 1,800 hours per year. The packing machine will cost $85,000, will 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. a. Determine the net present value for the two machines. Use the present value of an annuity of $1 table in the chapter (Exhibit 5). Round to the nearest dollar. b. Determine the present value index for the two machines. Round to two decimal places. c. If Diamond fit 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? Explain.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

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Chapter
Section
Chapter 26, Problem 26.13EX
Textbook Problem

Net present value method and present 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, will have an eight-year life, and will operate for 1,800 hours per year. The packing machine will cost $85,000, will 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.

  1. a. Determine the net present value for the two machines. Use the present value of an annuity of $1 table in the chapter (Exhibit 5). Round to the nearest dollar.
  2. b. Determine the present value index for the two machines. Round to two decimal places.
  3. c. If Diamond fit 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? Explain.

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Chapter 26 Solutions

Accounting
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