Vorteck Inc. manufactures snowsuits. Vorteck is considering purchasing a new sew
ID: 2386759 • 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: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 $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%.
***Use the net present value method to determine whether Vorteck should purchase the new machine to replace the exiting machine, and state the reason for your conclusion.
Explanation / Answer
machine
2,500,000
Less market -----old machine
260,000
c- value
2,240,000
Training (85,000 x 1-0.4)
51,000
Ney investment
2,219,000
0
2,291,000
2,291,000
1
2291000
1
390,000(1-0.4)
234000
0.9174
214672
2
400,000(1-0.4)
240000
0.8417
202008
3
411,000(1-0.4)
246000
0.7722
190425
4
426,000(1-0.4)
255000
0.7084
181067
5
434,000(1-0.4)
260000
0.6499
169234
6
435,000(1-0.4)
261000
0.5963
155634
7
436,000(1-0.4)
261600
0.5470
143095
5
95,000(1-0.4)
57000
0.6499
37044
7
380,000
380000
0.5470
207860
Tax shiled
592420
Pv lost
57344
Ney present value
324973
machine
2,500,000
Less market -----old machine
260,000
c- value
2,240,000
Training (85,000 x 1-0.4)
51,000
Ney investment
2,219,000
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