Question

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 $241,293. 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 4 $390,800 400,900 410,600 425,200 433,000 434,600 436,500 7 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 $97,100 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 values Determine whether Hillsong should purchase the new machine to replace the existing machine?

Answer 1

Solution:

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 current machine	0	-$2,41,293	1	-$2,41,293
Maintenance cost	5	$97,100	0.64993	$63,108
Present value of cash outflows (A)				$23,56,815
Cash Inflows:
Annual cost savings:
Year 1	1	$3,90,800	0.91743	$3,58,532
Year 2	2	$4,00,900	0.84168	$3,37,430
Year 3	3	$4,10,600	0.77218	$3,17,057
Year 4	4	$4,25,200	0.70843	$3,01,224
Year 5	5	$4,33,000	0.64993	$2,81,420
Year 6	6	$4,34,600	0.59627	$2,59,139
Year 7	7	$4,36,500	0.54703	$2,38,779
Salvage value of new machine	7	$3,79,200	0.54703	$2,07,434
Present value of cash Inflows (B)				$23,01,014
NPV (B-A)				-$55,802

No, Hillsong should not purchase the new machine.