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 $260,000. 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 $380,000. This new equipment would require maintenance costs of $95,000 at the end of the fifth year. The cost of capital is 9%. Use the net present value method to determine whether Vorteck should purchase the new machine to replace the exiting machine, and state the reason for your conclusion. Investment in new equipment Disposal of old equipment Additional training required Net initial investment required Calculation of net present value:

ANSWER SHEET BELOW.... Discount Factor, 9% Amount Present Value Cash flows Year 1 2 3 4 5 6 7 Maintenance 5 Net cash flows from operations: Terminal salvage 7 Present value of cash inflows Initial investment Net Present Value