Question

Exercise 12-3 (Video) Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hillsong spent $55,000 to keep it operational. The existing sewing machine can be sold today for $240,352. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7: Year 1 $390,600 2 400,200 3 410,000 4 425,200 5 432,400 6 435,500 7 436,300 The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $380,500. This new equipment would require maintenance costs of $94,900 at the end of the fifth year. The cost of capital is 9%. Click here to view PV table. Use the net present value method to determine the following: (If net present value is negative then enter with negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round present value answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the net present value. Net present value $ Determine whether Hillsong should purchase the new machine to replace the existing machine?

Answer 1

Solution:

Computation of NPV - Replacement proposal of Sewing Machine - Hillsong Inc.
Particulars	Period	Amount	PV Factor (9%)	Present Value
Cash Outflows:
Cost of new sewing machine	0	$2,450,000	1	$2,450,000
Training cost	0	$85,000	1	$85,000
Sale value of machine	0	-$240,352	1	-$240,352
Maintenance cost	5	$94,900	0.64993	$61,678
Present value of cash outflows (A)				$2,356,326
Cash Inflows:
Annual cost savings:
Year 1	1	$390,600	0.91743	$358,348
Year 2	2	$400,200	0.84168	$336,840
Year 3	3	$410,000	0.77218	$316,594
Year 4	4	$425,200	0.70843	$301,224
Year 5	5	$432,400	0.64993	$281,030
Year 6	6	$435,500	0.59627	$259,676
Year 7	7	$436,300	0.54703	$238,669
Salvage value of new machine	7	$380,500	0.54703	$208,145
Present value of cash Inflows (B)				$2,300,526
NPV (B-A)				-$55,800