?Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new

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?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%.

Exercise 26-3 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 6 435,500 437,400 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%. ew PV tabl 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

Explanation / Answer

Solution:

Computation of NPV - Replacement proposal of equipment - Hillsong Inc. Particulars Period Amount PV Factor Present Value Cash Outflows: Cost of new equipment 0 $2,450,000.00 1 $2,450,000 Sale value of old equipment 0 -$242,006.00 1 -$242,006 Training cost 0 $85,000.00 1 $85,000 Maintenane Cost 5 $95,100.00 0.64993 $61,808 Present value of cash outflows (A) $2,354,802 Cash Inflows: Decrease in operating cost: Year 1 1 $389,300.00 0.91743 $357,155 Year 2 2 $399,400.00 0.84168 $336,167 Year 3 3 $410,500.00 0.77218 $316,980 Year 4 4 $425,500.00 0.70843 $301,437 Year 5 5 $432,800.00 0.64993 $281,290 Year 6 6 $435,500.00 0.59627 $259,676 Year 7 7 $437,400.00 0.54703 $239,271 Salvage value of new machine 7 $380,100.00 0.54703 $207,926 Present value of cash Inflows (B) $2,299,902 NPV (B-A) -$54,901

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