Crane Inc. manufactures snowsuits. Crane is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased 5 years ago at a price of $1.8 million; six months ago, Crane spent $55,000 to keep it operational. The existing sewing machine can be sold today for $241,835. 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 $389,500 2 399,400 3 411,000 4 425,400 5. 433,700 6 435,300 7 437,300 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 $379,500. This new equipment would require maintenance costs of $94,500 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 O decimal places, eg. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the net present value. Net present value $ 3550299 Determine whether Crane should purchase the new machine to replace the existing machine? Yes
Crane Inc. manufactures snowsuits. Crane is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased 5 years ago at a price of $1.8 million; six months ago, Crane spent $55,000 to keep it operational. The existing sewing machine can be sold today for $241,835. 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 $389,500 2 399,400 3 411,000 4 425,400 5. 433,700 6 435,300 7 437,300 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 $379,500. This new equipment would require maintenance costs of $94,500 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 O decimal places, eg. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the net present value. Net present value $ 3550299 Determine whether Crane should purchase the new machine to replace the existing machine? Yes
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 30P: Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of...
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Transcribed Image Text:Crane Inc. manufactures snowsuits. Crane is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing
machine was purchased 5 years ago at a price of $1.8 million; six months ago, Crane spent $55,000 to keep it operational. The existing
sewing machine can be sold today for $241,835. 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
$389,500
2
399,400
3
411,000
4
425,400
5. 433,700
6
435,300
7
437,300
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 $379,500. This new equipment would require maintenance costs of $94,500 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 O decimal places, eg. 125. For calculation purposes, use 5 decimal
places as displayed in the factor table provided.)
Calculate the net present value.
Net present value
$
3550299
Determine whether Crane should purchase the new machine to replace the existing machine?
Yes
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