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
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 $241,533. 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 | 399,600 | |||
3 | 410,800 | |||
4 | 426,000 | |||
5 | 433,300 | |||
6 | 434,600 | |||
7 | 436,700 |
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 $379,000. This new equipment would require maintenance costs of $95,500 at the end of the fifth year. The cost of capital is 9%.
Calculate the net present value.
Determine whether Hillsong should purchase the new machine to replace the existing machine?
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