Exercise 26-3 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 $243,773. 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 |
$389,600 |
| 2 |
400,100 |
| 3 |
410,700 |
| 4 |
426,000 |
| 5 |
433,400 |
| 6 |
434,700 |
| 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 $379,700. This new equipment would require maintenance costs of $99,500 at the end of the fifth year. The cost of capital is 9%.
Click here to view PV 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.
Determine whether Hillsong should purchase the new machine to replace the existing machine?