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 $ 243,773. 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		400,100
	3		410,700
	4		426,000
	5		433,400
	6		434,700
	7		436,900

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 $ 379,700. This new equipment would require maintenance costs of $ 99,500 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?

select between Yes or No

Answer 1

Working Note 1 : Computation of initial investment.

New machine cost	$2,450,000
Add: One time training cost	$85,000
Less : Selling price of old machine	($243,773)
Initial investment	$2,291,227

Working Note 2 : Computation of Present value of cash inflows.

Year	Amount ($)	PV factor @ 9 %	Present value
1	389,600	0.91743	357,431
2	400,100	0.84168	336,756
3	410,700	0.77218	317,134
4	426,000	0.70843	301,791
5	433,400	0.64993	281,680
6	434,700	0.59627	259,199
7	436,900	0.54703	238,997
5 - Maintenance costs	(99,500)	0.64993	(64,668)
7 - Terminal value (ie salvage value)	379,700	0.54703	207,707
Present value of cash inflows			$2,236,027

Answer 1 : Computation of Net present value

Particular	Amount ($)
Initial investment (working note 1)	(2,291,227)
Present value of cash inflows (working note 2)	2,236,027
Net present value	($55,200)

Answer 2 . No

Reason : Net present value is negative