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 $241,378. 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		$390,000
	2		400,500
	3		410,200
	4		425,800
	5		433,600
	6		434,500
	7		436,900

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 $380,000. This new equipment would require maintenance costs of $96,200 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.

Net present value

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

Answer 1

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Cost of New sewing Machine	-2450000
Sale of existing machine	241378
Training Cost	-85000
Saving in operating costs		390000	400500	410200	425800	433600	434500	436900
Maintenance costs						-96200
Salvage value of new machine							380000
Net cash flows	-2293622	390000	400500	410200	425800	337400	434500	816900
Discount factor at 9%	1	0.91743	0.84168	0.77218	0.70843	0.64993	0.59627	0.54703
Discounted cash flows	-2293622.00	357797.70	337092.84	316748.24	301649.49	219286.38	259079.32	446868.81
NPV								-55099

Notes: ignore expenditure spent on old sewing machine six months ago as it is historical cost

Depreciation is not considered as there is no tax.