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 $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		$389,400
	2		399,000
	3		410,800
	4		425,200
	5		433,400
	6		434,500
	7		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 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 value

$enter the net present value in dollars rounded to 0 decimal places

Determine whether Hillsong should purchase the new machine to replace the existing machine?

select an option                                                          YesNo

Answer 1

1.

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	-$2,42,828	1	-$2,42,828
Maintenance cost	5	$95,600	0.64993	$62,133
Present value of cash outflows (A)				$23,54,305
Cash Inflows:
Annual cost savings:
Year 1	1	$3,89,400	0.91743	$3,57,247
Year 2	2	$3,99,000	0.84168	$3,35,830
Year 3	3	$4,10,800	0.77218	$3,17,212
Year 4	4	$4,25,200	0.70843	$3,01,224
Year 5	5	$4,33,400	0.64993	$2,81,680
Year 6	6	$4,34,500	0.59627	$2,59,079
Year 7	7	$4,37,600	0.54703	$2,39,380
Salvage value of new machine	7	$3,79,600	0.54703	$2,07,653
Present value of cash Inflows (B)				$22,99,305
NPV (B-A)				-$55,000

2.

No.

As NPV is negative, hillsong should not purchase the new machine to replace existing machine.