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
$245,788. 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 | $389,300 | ||
---|---|---|---|---|
2 | 399,900 | |||
3 | 410,000 | |||
4 | 425,500 | |||
5 | 432,400 | |||
6 | 434,500 | |||
7 | 438,000 |
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 $379,400. This new equipment would require
maintenance costs of $98,800 at the end of the fifth year. The cost
of capital is 9%.
Click here to view the factor 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?
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