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 $250,000. 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		400,000
	3		411,000
	4		426,000
	5		434,000
	6		435,000
	7		436,000

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 $400,000. This new equipment would require maintenance costs of $100,000 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.

Answer 1

Solution:

Computation of NPV - Replacement proposal of equipment - Hillsong Inc.
Particulars	Period	Amount	PV Factor	Present Value
Cash Outflows:
Cost of new equipment	0	$2,450,000.00	1	$2,450,000
Sale value of old equipment	0	-$250,000.00	1	-$250,000
Training cost	0	$85,000.00	1	$85,000
Maintenane Cost	5	$100,000.00	0.64993	$64,993
Present value of cash outflows (A)				$2,349,993
Cash Inflows:
Decrease in operating cost:
Year 1	1	$390,000.00	0.91743	$357,798
Year 2	2	$400,000.00	0.84168	$336,672
Year 3	3	$411,000.00	0.77218	$317,366
Year 4	4	$426,000.00	0.70843	$301,791
Year 5	5	$434,000.00	0.64993	$282,070
Year 6	6	$435,000.00	0.59627	$259,377
Year 7	7	$436,000.00	0.54703	$238,505
Salvage value of new machine	7	$400,000.00	0.54703	$218,812
Present value of cash Inflows (B)				$2,312,391
NPV (B-A)				-$37,602