Exercise 12-3

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 $ 240,438 . 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		$ 390,900
	2		399,800
	3		410,100
	4		425,400
	5		434,000
	6		434,900
	7		436,400

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 $ 379,100 . This new equipment would require maintenance costs of $ 94,000 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.

Net present value

$

Determine whether Hillsong should purchase the new machine to replace the existing machine?

Yes No