Question

Sheridan Inc. manufactures snowsuits. Sheridan 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, Sheridan 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 $390,600 2 399,400 3 411,000 4 425,900 5 432,000 6 434,600 7 436,400 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 es -45 or parentheses es (45). Round present value answer to decimal places, es. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the net present value. Net present value $

Answer 1

ANSWER

COMPUTATION OF NPV

Net Present Value = Present Value of Inflows - Present Value of Outflows

Particulars		Period	Amount	PV Factor (9%)	Present Value
CASH INFLOWS
Annual cost savings - Decrease In Operating Costs
Year 1		1	$390,600.00	0.91743	358348.158
Year 2		2	$399,400.00	0.84168	336166.992
Year 3		3	$411,000.00	0.77218	317365.980
Year 4		4	$425,900.00	0.70843	301720.337
Year 5		5	$432,000.00	0.64993	280769.760
Year 6		6	$434,600.00	0.59627	259138.942
Year 7		7	$436,400.00	0.54703	238723.892
Salvage value		7	$379,400.00	0.54703	207543.182
PRESENT VALUE OF CASH INFLOWS (1)					$2,299,777.24
CASH OUTFLOWS
Cost of the new Sewing Machine	$2,450,000.00
Less : Selling Price of old Machine	(241,846.00)
Net Cost of the new Sewing Machine	$2,208,154.00	0	$2,208,154.00	1	$2,208,154.00
Training cost		0	$85,000.00	1	$85,000.00
Maintenance cost		5	$94,200.00	0.64993	$61,223.41
PRESENT VALUE OF CASH OUTFLOWS (2)					$2,354,377.41
NPV (1) - (2)					(54,600.00)