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 $242,006. 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		$389,300
	2		399,400
	3		410,500
	4		425,500
	5		432,800
	6		435,500
	7		437,400

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 $380,100. This new equipment would require maintenance costs of $95,100 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

Answer 1

Solution:

Computation of NPV - Replacement proposal of Sewing Machine - Hillsong Inc.
Particulars	Period	Amount	PV Factor (9%)	Present Value
Cash Outflows:
Cost of new sewing machine	0	$2,450,000	1	$2,450,000
Training cost	0	$85,000	1	$85,000
Sale value of current machine	0	-$242,006	1	-$242,006
Maintenance cost	5	$95,100	0.64993	$61,808
Present value of cash outflows (A)				$2,354,802
Cash Inflows:
Annual cost savings:
Year 1	1	$389,300	0.91743	$357,155
Year 2	2	$399,400	0.84168	$336,167
Year 3	3	$410,500	0.77218	$316,980
Year 4	4	$425,500	0.70843	$301,437
Year 5	5	$432,800	0.64993	$281,290
Year 6	6	$435,500	0.59627	$259,676
Year 7	7	$437,400	0.54703	$239,271
Salvage value of new machine	7	$380,100	0.54703	$207,926
Present value of cash Inflows (B)				$2,299,902
NPV (B-A)				-$54,901