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

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 $55,000 to keep it operational. The existing sewing machine can be sold today for $ 243,175 . 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 2 399,700 3 410,200 4 425,200 5 433,400 6 434,500 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 $ 379,200 . This new equipment would require maintenance costs of $ 95,900 at the end of the fifth year. The cost of capital is 9%. Click here to view PV table.

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.

1. Net present value $

2. Determine whether Hillsong should purchase the new machine to replace the existing machine?

Explanation / Answer

1 Initial cost of investment: Amount ($) Purchase cost 2450000 Sale value of existing machine -243175 Training cost 85000 Net initial investment required 2291825 Present value of cashflows: Year Savings in operating cost Maintenance cost Salvage value Net cash flow PV @ 9% Present value 1 390000 0 0 390000 0.91743 357797.7 2 399700 0 0 399700 0.84168 336419.5 3 410200 0 0 410200 0.77218 316748.2 4 425200 0 0 425200 0.70843 301224.4 5 433400 -95900 0 337500 0.64993 219351.4 6 434500 0 0 434500 0.59627 259079.3 7 437400 0 379200 816600 0.54703 446704.7 2237325 Net present value=Present value of cashflows-Initial investment=2237325-2291825=-54500 2 New machine should not be purchased since present value of cashinflows is less than Initial investment

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