Question

Exercise 24-3 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 $240,438. 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 $390,900 2 399,800 3 410,100 4 425,400 5 434,000 6 434,900 7 436,400 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 $379,100. This new equipment would require maintenance costs of $94,000 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? Click if you would like to Show Work for this question:

Answer 1

Calculations of Present Value Factors

Calculation of PVF
1	0.917431
2	0.84168
3	0.772183
4	0.708425
5	0.649931
6	0.596267
7	0.547034

Calculation of NPV of the new machine

	Amount	Year	PVF	Amount
Present Value of Cash Outflows
Purchase Price	$     2,450,000	0	1	$ 2,450,000.00
Maintainence cost	$          94,000	5	0.649931	$       61,093.55
Total				$ 2,511,093.55
Present Value of Cash Inflows
Training Costs	$          85,000	0	1	$       85,000.00
Savings in operating costs	$        390,900	1	0.917431	$     358,623.85
	$        399,800	2	0.84168	$     336,503.66
	$        410,100	3	0.772183	$     316,672.45
	$        425,400	4	0.708425	$     301,364.08
	$        434,000	5	0.649931	$     282,070.22
	$        434,900	6	0.596267	$     259,316.66
	$        436,400	7	0.547034	$     238,725.74
Salvage Value	$        379,100	7	0.547034	$     207,380.68
Total				$ 2,385,657.35
Net Present Value				$    (125,436.20)

But the company can sale the old machine for $ 240,438. Hence, actual NPV comes out to be $ 240,438 - $ 125,436 = $ 115,002.

Hence, Hillsong should purchase the new machine to replace the existing machine

Note- Sunk cost and Depreciation are to be ignored.