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 $ 241,533 . 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		$ 389,600
	2		399,600
	3		410,800
	4		426,000
	5		433,300
	6		434,600
	7		436,700

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 $ 379,000 . This new equipment would require maintenance costs of $ 95,500 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.

Net present value

$

Determine whether Hillsong should purchase the new machine to replace the existing machine?

Answer 1

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Hillsong Inc.
Particulars	Y0	Y1	Y2	Y3	Y4	Y5	Y6	Y7	Total
Purchase Price	(2,450,000.00)	-	-	-	-	-	-	-	(2,450,000.00)
Training cost	(85,000.00)	-	-	-	-	-	-	-	(85,000.00)
Salvage Value of old machine	241,533.00	-	-	-	-	-	-	-	241,533.00
Maintenance cost	-	-	-	-	-	(95,500.00)	-	-	(95,500.00)
Operating Cost savings	-	389,600.00	399,600.00	410,800.00	426,000.00	433,300.00	434,600.00	436,700.00	2,930,600.00
Salvage Value of new machine	-	-	-	-	-	-	-	379,000.00	379,000.00
Total Cash flows	(2,293,467.00)	389,600.00	399,600.00	410,800.00	426,000.00	337,800.00	434,600.00	815,700.00
PV factor @ 9%	1.00	0.917	0.842	0.772	0.708	0.650	0.596	0.547
PV of cash flows	(2,293,467.00)	357,431.19	336,335.33	317,212.97	301,789.14	219,546.82	259,137.78	446,215.83	(55,797.93)

So net present value is negative $ 55,797.93

As net present value is negative so equipment should not be replaced.