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 $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 2 $390,600 399,400 411,000 425,900 432,000 434,600 436,400 5 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 o 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 t Determine whether Hillsong should purchase the new machine to replace the existing machine?

Answer 1

Solution a:

Computation of NPV - Replacement proposal of Sewing Machine - Hillsong Inc.
Particulars	Period	Amount	PV Factor (9%)	Present Value
Cash Outflows:
Cost of new sewing machine	0	$24,50,000	1	$24,50,000
Training cost	0	$85,000	1	$85,000
Sale value of machine	0	-$2,41,846	1	-$2,41,846
Maintenance cost	5	$94,200	0.64993	$61,223
Present value of cash outflows (A)				$23,54,377
Cash Inflows:
Annual cost savings:
Year 1	1	$3,90,600	0.91743	$3,58,348
Year 2	2	$3,99,400	0.84168	$3,36,167
Year 3	3	$4,11,000	0.77218	$3,17,366
Year 4	4	$4,25,900	0.70843	$3,01,720
Year 5	5	$4,32,000	0.64993	$2,80,770
Year 6	6	$4,34,600	0.59627	$2,59,139
Year 7	7	$4,36,400	0.54703	$2,38,724
Salvage value of new machine	7	$3,79,400	0.54703	$2,07,543
Present value of cash Inflows (B)				$22,99,777
NPV (B-A)				-$54,600

Solution b:

No, Hillsong should not purchase the new machine.