Hillsong inc manufactures snowsuits. Hillsong is considering purchasing a new se
ID: 2415895 • Letter: H
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 55000 to keep it operational. The existing sewing machine can be sold today for 250000. The new sewing machine would require a one-time 85000 training cost. Operating cost would decrease by the following amounts for 1 to 7 years.
390000
426000
the new sewing machine would be depreceiated according to the declining balance method at a rate of 20%. The salvage value is expected to be 400000. This new equipment would require mainteance cost of 100000 at the end of the fifth year. The cost of capital is 9%.
Instructions
use the net present value method to determine whether Hillsong should purchase the new machine to replace the existing machine and state the reason for your conclusion.
year 1390000
2 400000 3 411000 4426000
5 434000 6 435000 7 436000Explanation / Answer
Year Cashflow PV@9% DCFAT
1 55,000 0.917 50,435
2 400,000 1.759 703,600
3 411,000 2.531 1040,241
4 426,000 3.240 1380,240
5 334,000 3.890 1299,260
6 435,000 4.486 1951,410
7 36,000 5.033 181,188
Total DCFAT 6606,374
NET PRESENT VALUE= TOTAL DCFAT-INITIAL INVESTMENT
=6,606,374-2,450,000
=$4156,374
Since the NPV is a positive value,the company should opt to purchase the new machine.
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