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 $239,855. 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 2 3 4 5 6 7 $389,000 400,900 411,000 425,700 432,400 435,400 436,900 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 $380,600. This new equipment would require maintenance costs of $94,400 at the end of the fifth year. The cost of capital is 9%.
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 $239,855. 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 2 3 4 5 6 7 $389,000 400,900 411,000 425,700 432,400 435,400 436,900 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 $380,600. This new equipment would require maintenance costs of $94,400 at the end of the fifth year. The cost of capital is 9%.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 $239,855. 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
2
3
4
5
6
7
$389,000
400,900
411,000
425,700
432,400
435,400
436,900
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 $380,600. This new equipment would require maintenance costs of $94,400 at the end of the fifth year. The cost of
capital is 9%.
Transcribed Image Text: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, 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?
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