Vorteck Inc. manufactures snowsuits. Vorteck is considering purchasing a new sew
ID: 2348390 • Letter: V
Question
Vorteck Inc. manufactures snowsuits. Vorteck is considering purchasing a new sewing machine at a cost of $2.5 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Vorteck spent $55,000 to keep it operational. The existing sewing machine can be sold today for $260,000. 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:
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 $95,000 at the end of the fifth year. The cost of capital is 9%.
Instructions
Calculate the net present value. (If net present value is negative enter with either a (-) sign preceding the number or (parenthesis) around the number. Round computations and final answer for present value to 0 decimal places, e.g. 125. Round computations for Discount Factor to 5 decimal places.)
$
Explanation / Answer
Cash-out flow in year 0 2,500,000--------------new machine 85,000----------------------training 260,000-------------------old machine- 2,500,000+85,000-260,000= 2,325,000 2) Discounted cash flow in year 0 cash flow, discount per year rate of 9% sold in year 7. year 1 390,000/1.09 357,798.17 year 2 400,000/(1.09)^2 336,672.00 year 3 411,000/(1.09)^3 317,367.41 year 4 426,000/(1.09)^4 301,789.14 year 5 (434,000-95,000(maintenance))/(1.09)^5 220,326.74 year 6 435,000/(1.09)^6 259,376.29 year 7 436,000 + 380,000(residual value of the new machine))/(1.09)^7 446,379.94 Total 2,239,709.69 Since the cash-out flow(2,325,000) is larger than the discounted cash flow(2,239,709.69), shouldn't buy the new machine.
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