Question

Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of...

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

Homework Answers

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.

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