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Diamond and Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 130 baseballs per hour to sewing 234 per hour. The contribution margin per unit is $0.48 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 $26 per hour. The sewing machine will cost $305,500, have an eight-year life, and will operate for 1,400 hours per year. The packing machine will cost $131,800, have an eight-year life, and will operate for 1,200 hours per year. Diamond and Turf seeks a minimum rate of return of 12% on its investments.Present Value of an Annuity of $1 at Compound InterestYear 6% 10% 12% 15% 20%1 0.943 0.909 0.893 0.870 0.8332 1.833 1.736 1.690 1.626 1.5283 2.673 2.487 2.402 2.283 2.1064 3.465 3.170 3.037 2.855 2.5895 4.212 3.791 3.605 3.353 2.9916 4.917 4.355 4.111 3.785 3.3267 5.582 4.868 4.564 4.160 3.6058 6.210 5.335 4.968 4.487 3.8379 6.802 5.759 5.328 4.772 4.03110 7.360 6.145 5.650 5.019 4.192A. Determine the net present value for the two machines. Use the table of present values of an annuity of $1 above.B. Determine the present value index for the two machines.C. If Diamond and 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?

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Answer:

A) Sewing machine:

initial outlay = -$305,500

net cash flow per year = (234 baseballs per hour - 130 baseballs per hour) x 1,400 hours x $0.48 per baseball = $69,888

NPV = -$305,500 + ($69,888 x 4.968) = -$305,500 + $347,203.58 = $41,703.58

Packing machine:

initial outlay = -$131,800

net cash flow per year = 1,200 hours x $26 per hour = $31,200

NPV = -$131,800 + ($31,200 x 4.968) = -$131,800 + $155,001.60 = $23,201.60

B) PVI of sewing machine = $347,203.58 / $305,500 = 1.137

PVI of packing machine = $155,001.60 / $131,800 = 1.176

C) They should invest in the packing machine since its PVI is higher, meaning that it increases the company's value by a higher amount per dollar invested.

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