Question

er 1201 Exercise 12-3 (Video) 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: Ve 390000 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. Determine whether Hillsong should purchase the new machine to replace the existing machine? Click if you w h o show work for this question how Work Question Attempts: Unlimited EPLATER MITANTE

Answer 1

Compute the NPV: (Ctrl) PV Net Cash Factors @ Discounted Flows Year 9% Cash Inflow 1 $390,000 0.91743 $357,798 2 $399,700 0.841681 $336,419 3 $410,200 0.77218 $316,750 4 $425,200 0.70843 $301,222 $433,400 - $95,900 = $337,500 5 $337,500 0.64993 $219,352 6 $434,500 0.59627 $259,078 $437,400 + $379,200 = $816,600 7 $816,600 0.54703 $446,708 Present value of cash inflows $2,237,328

The net investment in the new sewing machine Particulars Amount Investment in new equipment: $ 2,450,000 Disposal of old equipment: $ (243,175) Additional training required: $ 85,000 Net initial investment required: $ 2.291.825 Particulars Present value of cash inflows -Net investment Net Present Value Amount 2.237,328 (2,291,825) (54,497)