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 an optionselect an option

Answer 1

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Year		0	1	2	3	4	5	6	7
Cash Flows:
Initial Investment		$     -2,450,000
Old Machin Sale		$         243,773
Training cost		$          -85,000
Reduction in Cost			$389,600	$400,100	$410,700	$426,000	$433,400	$434,700	$436,900
Salvage Value									$379,700
Maintenance							$ -99,500
Net Cash Flow	a	$     -2,291,227	$389,600	$400,100	$410,700	$426,000	$333,900	$434,700	$816,600
PVF 9%	b	$         1.00000	$0.91743	$0.84168	$0.77218	$0.70843	$0.64993	$0.59627	$0.54703
										Net Present Value
Present Value	a*b	$     -2,291,227	$357,431	$336,756	$317,134	$301,791	$217,012	$259,199	$446,705	$               -55,200
whether Hillsong should purchase the new machine to replace the existing machine? select an optionselect an option
NO, since NPV is negative