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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 $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

Homework Answers

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.
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