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 $246,028. 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 $389,000 2 399,000 3 410,000 4 425,000 5 432,000 6 434,500 7 436,000 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 $379,000. This new equipment would require maintenance costs of $94,000 at the end of the fifth year. The cost of capital is 9%.. 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.

Answer 1

Net Investment in new sewing machine = Cost of thr new machine - current sale price of existing machine + one time training cost

= $ 2.44 million - $ 246,028 + $ 85000

= $ 2,278,972

Calculation of present value of operating costs:

Years	Operating costs	present value factor @ 9%	Present value
1.	389,000	0.917	356,713
2.	399,000	0.842	335,958
3.	410,000	0.772	316,520
4.	425,000	0.708	300,900
5.	432,000 - 94000	0.65	219,700
6.	434,500	0.596	258,962
7.	436,000 + 379,000	0.547	445,805
		Total	2,234,558

Net Present value = Present value of Operating costs - Present value of Cash outflows

= 2,234,558 - 2,278,972

= ( $ 44,414) or - $44,414

Therefore, Net present value = ($44,414)