Response to the following problem:
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
|
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 a present value factor for anannuity of $1 which can be used in determining the internal rate of return. If required, round your answers to three decimal places.
b. Using the factor determined in part (a) and the present value of an annuity of $1 table above, determine the internal rate of return for the proposal.