Vorteck Inc. manufactures snowsuits. Vorteck is considering purchasing a new sew
ID: 2371855 • 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 $260,885. 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 $380,100. This new equipment would require maintenance costs of $95,300 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
1.8 Million plus 55K is sunk cost thus we do not include this in our calculations
Initial Costs
Cost of Machinery = $-2,500,000
Training Costs = $-85,000
Proceeds from sale of Old Machine = $260,000
Initial Cash Flow CF0 = $-2,325,000
Interim Cash Flows
$390,000 $400,000 $411,000 $426,000 $434,000 $435,000
Teminal Cash Flow = $436,000 + $380,000 = $816,000
Free Net Cash Flows are
-2325000 390000 400000 411000 426000 434000 435000 816000
Your Cost of Capital is 9%
NPV = $-23,547
The answer was arrived at using this online NPV Calculator
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