Question

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 $240,845. 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		$391,000
	2		399,100
	3		411,000
	4		426,000
	5		433,200
	6		435,300
	7		436,500

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 $379,800. This new equipment would require maintenance costs of $94,900 at the end of the fifth year. The cost of capital is 9%.



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

Answer 1

Investment in new equipment:	$ 2,450,000.00
Disposal of old equipment:	$   (240,845.00)
Additional training required:	$        85,000.00
Net initial investment required:	$ 2,294,155.00

Calculation of Present value of cash inflows-

Year	Cash flows	Discount	Amount
1	$ 391,000.00	0.91743	$        358,715
2	$ 399,100.00	0.84168	$        335,914
3	$ 411,000.00	0.77218	$        317,366
4	$ 426,000.00	0.70843	$        301,791
5	$ 433,200.00	0.64993	$        281,550
6	$ 435,300.00	0.59627	$        259,556
7	$ 436,500.00	0.54703	$        238,779
Total Cash flow			$ 2,093,671.00
Maintenance at end of Yr 5	$ (94,900.00)	0.64993	$            (61,678)
Terminal Salvage 7	$ 379,800.00	0.54703	$            207,762
Present value of cash inflows			$ 2,239,755.00

Net Present Value = 2,239,755 - 2,294,155 = (54,400)

Based on the net present value, the sewing machine should not be purchased.