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 $243,175. 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		$390,000
	2		399,700
	3		410,200
	4		425,200
	5		433,400
	6		434,500
	7		437,400

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 $379,200. This new equipment would require maintenance costs of $95,900 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

$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?

Answer 1

computation of Initial net cash out flow
	year	particularrs	amount(in $)	present value (9%)	Discounted amount(in $)
	a	b	c	d	e=c*d
	0	cost of new machine	2450000	1	2450000
	0	ADD:training cost of new machine	85000	1	85000
	5	Add: maintanence cost	95900	0.650	62328
	0	less :cash inflow from sale of exising machine	-243175	1	-243175
		Net initial cash out flow	(A)		2354153
Note	1	cost of existing machine purchase cost at 5 years and cost incurred six months ago for operational are sunk cost or historical cost and not relevant for decision mankin
	2	assuming cost of maintanence is of capital in nature and added to cost of asset
	3	Depreciation on exixting machine will not be considered as no there is no idea of useful life furthe

computation of net cash In flows
	year	particulars	savings in cost(in $)	savings in Depreciation	Total savings	present value (9%)	Discounted amount(in $)
	a	b	c	d	e=c+d	f	g=e*f
	1	Savings	390000	0	390000	0.917	357798
	2	Savings	399700	0	399700	0.842	336419
	3	Savings	410200	0	410200	0.772	316750
	4	Savings	425200	0	425200	0.708	301222
	5	Savings	433400	0	433400	0.650	281680
	6	Savings	434500	0	434500	0.596	259078
	7	Savings	437400	0	437400	0.547	239273
	7	Terminal or residual value	379200	0	379200	0.547	207435
		Total cash inflows (B)	2299656
		computaion of NPV	(B)-(A)				-54497
	NOTE:Since NPV is negative , new machine should not be purchased and there is no tax rate given , therefore depreciation will not be computed In inflow sheet as deprecitaion is a non cash expenditure

		computaion of depreciation table
year	opening balance	Depreciation @20%	closing balance
a	b	c=b*20*	d=b-c
0	2597328	519466	2077863
1	2077863	415573	1662290
2	1662290	332458	1329832
3	1329832	265966	1063866
4	1063866	212773	851093
5	851093	170219	680874
6	680874	136175	544699
7	544699	108940	435759