Problem - Vorteck Inc. manufactures snowsuits. Vorteck is considering purchasing a new sewing machine at a cost of $2.5 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Vorteck spent $55,000 to keep it operational. The existing sewing machine can be sold today for $262,745. 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 $390,600
Year 2 399,500
Year 3 410,200
Year 4 425,300
Year 5 432,900
Year 6 434,600
Year 7 436,300
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 $379,200. This new equipment would require maintenance costs of $95,900 at the end of the fifth year. The cost of capital is 9%.
Instructions -
Calculate the net present value.
Should Vorteck purchase the new machine to replace the existing machine?