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 $241,378. 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		400,500
	3		410,200
	4		425,800
	5		433,600
	6		434,500
	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 $380,000. This new equipment would require maintenance costs of $96,200 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?

Answer 1

Statement Showing Computation of NPV - Replacement proposal of equipment - Hillsong Inc.
Particulars	Period	Amount	PV Facr	Present Value
Cash Outflows:
Cost of new equipment	0	$2,450,000	1	$2,450,000
Sale value of old equipment	0	($241,378)	1	($241,378)
Training cost	0	$85,000	1	$85,000
Maintenane Cost	5	$96,200	0.64993	$62,523
Present value of cash outflows (A)				$2,356,145
Cash Inflows:
Decrease in operating cost:
Year 1	1	$390,000	0.91743	$357,798
Year 2	2	$400,500	0.84168	$337,093
Year 3	3	$410,200	0.77218	$316,748
Year 4	4	$425,800	0.70843	$301,649
Year 5	5	$433,600	0.64993	$281,810
Year 6	6	$434,500	0.59627	$259,079
Year 7	7	$436,900	0.54703	$238,997
Salvage value of new machine	7	$380,000	0.54703	$207,871
Present value of cash Inflows (B)				$2,301,046
NPV (B-A)				($55,099)