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 $240,352. 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		400,200
	3		410,000
	4		425,200
	5		432,400
	6		435,500
	7		436,300

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 $380,500. This new equipment would require maintenance costs of $94,900 at the end of the fifth year. The cost of capital is 9%.

Answer 1

Answer with working is given below

Since NPV is negative investment should not be made

Initial Investment Cost of new machine Less: Salvage value of Existing machine Net cost of machine Add: Training expenses Total Initial Investment $2,450,000 $240,352 $2,209,648 $85,000 $2,294,648 Calculation of Net present value Discounted Cash inflows PV factor Cash /(Outflows) at 9% Inflows /(Outflows) Year 1- Cash inflow Year 2- Cash inflow Year 3- Cash inflow Year 4- Cash inflow Year 5- Cash inflow Year 5- Maintenance cost Year 6- Cash inflow Year 7- Cash inflow Year 7- Salvage value Total Present value of Cash inflows Initial investment Net present value $390,600 $400,200 $410,000 $425,200 $432,400 -$94,900 $435,500 $436,300 $380,500 $358,349 0.9174 $336,840 $316,595 $301,222 $281,030 -$61,678 $259,674 $238,671 $208,147 $2,238,850 $2,294,648 -$55,798 0.8417 0.7722 0.7084 0.6499 0.6499 0.5963 0.5470 0.5470 Conclusion Since Net Present value is negative the investment should not be made