Question

Your answer is partially correct. Try again. 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 $242,828. 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 3 4 5 6 7 $389,400 399,000 410,800 425,200 433,400 434,500 437,600 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 $379,600. This new equipment would require maintenance costs of $95,600 at the end of the fifth year. The cost of capital is 9%. Click here to view the factor 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?

Answer 1

Answer is given below

Cash outflows Year Cost of new sewing machine Training cost Sale value-existing sewing machine Maintenance cost Total present value of Cash outflows PV factor Present value of Outflows at 9% Cash outflows $2,450,000 1 $2,450,000 $85,000 1 $85,000 $242,828 -$242,828 $95,600 0.64993 $62,133 $2,354,305 A Year Cash inflows Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 7- Salvage value Total present value of Cash Inflows PV factor Present value of Inflows at 9% Cash inflows $389,400 0.91743 $357,248 $399,000 0.84168 $335,830 $410,800 0.77218 $317,213 $425,200 0.70843 $301,222 $433,400 0.64993 $281,680 $434,500 0.59627 $259,078 $437,600 0.54703 $239,382 $379,600 0.54703 $207,654 $2,299,308 B Net present value $54,997 B-A b) Hillsong should not purchase the new machine to replace the existing machine since NPV is negative