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 $ 241,835 . The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7:
Year
1$ 389,500
2 399,400
3 411,000
4 425,400
5 433,700
6 435,300
7 437,300
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 $ 379,500 . This new equipment would require maintenance costs of $ 94,500 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.
Determine whether Hillsong should purchase the new machine to replace the existing machine?