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 $240,164. 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 $390,800 2 399,000 3 410,800 4 425,700 5 432,700 6 434,700 7 437,600 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 $379,900. This new equipment would require maintenance costs of $95,300 at the end of the fifth year. The cost of capital is 9%. Click here to view the factor 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? select an option

Answer 1

Investment in new equipment = $ 2,450,000

Disposal of old equipment = 240,164

Additional training required = $ 85,000

Net initial investment required = 2,450,000 – 240,164 +85,000 = $ 2,294,836

Year	Discount	Cash flows	DCF
1	0.91743	390,800	358,532
2	0.84168	399,000	335,830
3	0.77218	410,800	317,212
4	0.70843	425,700	301,579
5	0.64993	432,700	281,225
6	0.59627	434,700	259,199
7	0.54703	437,600	239,380
			2,092,956

Maintenance at end of 5th year = 0.64993 * 95300 = 61,938

Net cash flows from operations = 2092,956 – 61,938 = $ 2,031,018

Terminal salvage value in year 7 = 0.54703 * 379,900 = $ 207,817

Present value of cash inflows = 2031,018 + 207817 = $ 2,238,835

Initial investment = 2,294,836

Net present value = 2,238,835 - 2,294,836 = ($ 56,001)

The net present value is negative, hence, the new sewing machine shall not be purchased.