Exercise 24-3 Open Show Work Exercise 24-3 Hillsong Inc. manufactures snowsuits.
ID: 2801838 • Letter: E
Question
Exercise 24-3
Open Show Work
Exercise 24-3
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 $241,846. 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 $390,600 2 399,400 3 411,000 4 425,900 5 432,000 6 434,600 7 436,400
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 $379,400. This new equipment would require maintenance costs of $94,200 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.
Net present value $
Determine whether Hillsong should purchase the new machine to replace the existing machine?
Yes No
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Explanation / Answer
No, Hillsong should not purchase the new machine to replace the existing machine as the NPV is negative
Working notes:
1) Initial investment
0 1 2 3 4 5 6 7 Savings in operating costs $3,90,600 $3,99,400 $4,11,000 $4,25,900 $4,32,000 $4,34,600 $4,36,400 Maintenance cost $94,200 Initial investment -$22,93,154 Salvage value $3,79,400 Net cash flows -$22,93,154 $3,90,600 $3,99,400 $4,11,000 $4,25,900 $3,37,800 $4,34,600 $8,15,800 Discount factor $1 $0.91241 $0.83249 $0.75957 $0.69304 $0.63234 $0.57695 $0.52641 Present value of cash flows -$22,93,154 $3,56,387 $3,32,496 $3,12,184 $2,95,165 $2,13,603 $2,50,742 $4,29,447 NPV -$1,03,130Related Questions
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