Exercise 12-3
Hillsong Inc. manufactures snowsuits. Hillsong is consideringpurchasing a new sewing machine at a cost of $2.45 million. Itsexisting machine was purchased five years ago at a price of $1.8million; six months ago, Hillsong spent $55,000 to keep itoperational. The existing sewing machine can be sold today for $240,438 . The new sewing machine would require a one-time, $85,000training cost. Operating costs would decrease by the followingamounts for years 1 to 7:
| Year | 1 | | $ 390,900 | |
| 2 | | 399,800 | |
| 3 | | 410,100 | |
| 4 | | 425,400 | |
| 5 | | 434,000 | |
| 6 | | 434,900 | |
| 7 | | 436,400 | |
The new sewing machine would be depreciated according to thedeclining-balance method at a rate of 20%. The salvage value isexpected to be $ 379,100 . This new equipment would requiremaintenance costs of $ 94,000 at the end of the fifth year. Thecost 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 thenenter with negative sign preceding the number e.g. -45or parentheses e.g. (45). Round present value answer to 0 decimalplaces, e.g. 125. For calculation purposes, use 5 decimal places asdisplayed in the factor table provided.)
Calculate the net present value.
Determine whether Hillsong should purchase the new machine toreplace the existing machine?
