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 $241,115. 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		$389,000
	2		400,400
	3		411,000
	4		425,700
	5		433,800
	6		435,200
	7		437,500

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 $380,100. This new equipment would require maintenance costs of $95,300 at the end of the fifth year. The cost of capital is 9%.

Calculate the net present value.

Net present value

$enter the net present value in dollars rounded to 0 decimal places

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

select between Yes or No                                                          YesNo

Answer 1

1.Net Present Value =$(54300)

2. No , Hellisong should not purchase New Machine as the NPV is negative .

Net Present Value is present value of cash Inflows - PV of Cash Outflow at the discounted rate

Here Discouting rate is cost of capital @ 9%

NPV = - Initial Investment + PV Net Cash flows + PV Salvage

Initial Investment

Cost of New Machine	$2450000
Less Receipt from old Machine	$241115
Add:One time Trainning cost	$85000
Net Intial Investment	$2293885

Reduction in Operating Cost ( Saving in Cost ie Excess Cash inflow from that amount )

CALCULATION OF NPV

Year	Particulars	Amount	Discount @9%(PV table )	Present Value
0	Initial Investment	(2293885)	1	(2293885)
1	Annual Decrease in Operating Expense	$389000	0.91743	$356880
2	---,,----	$400400	0.84168	$337009
3		$411000	0.77218	$317366
4		$425700	0.70843	$301579
5		$433800	0.64993	$281940
5	Maintainance cost	$(95300)	0.64993	$(61938)
6	Decrease in operarting cost	$435200	0.59627	$259497
7	Decrease in operating cost	$437500	0.54703	$239326
7	Salvage	$380100	0.54703	$207926
	NPV			$(54300)

2. As NPV for new machine is negative, Hillsong should not purchase the new sewing maching .