Hillsong Inc . Manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.244 million. Its existing machine was purchased five years ago at a price of $1.8 million; six month ago. Hillsong spent $55,000 to keep it operational. The existing sewing machine can be sold today for $250,000. 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

2 400,000

3 411,000

4 426,000

5 434,000

6 435,000

7 436,000

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 $400,000. This new equipment would require maintenance costs of $100,000 at the end of the fifth year. the cost of capital is 9%

Instructions

Use the net present value method to determine whether Hillsong should purchase the new machine to replace the existing machine, and state the reason for your conclusion