Wildhorse Inc. manufactures snowsuits. Wildhorse 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, Wildhorse spent $55,000 to keep it operational. The existing sewing machine can be sold today for $245,090. 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 $389,800 2 399,800 3 410,200 4 425,400 5 432,400 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 $380,800. This new equipment would require maintenance costs of $99,000 at the end of the fifth year. The cost of capital is 9%. Click here to view the factor 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 0 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 Wildhorse should purchase the new machine to replace the existing machine?
Wildhorse Inc. manufactures snowsuits. Wildhorse 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, Wildhorse spent $55,000 to keep it operational. The existing sewing machine can be sold today for $245,090. 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 $389,800 2 399,800 3 410,200 4 425,400 5 432,400 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 $380,800. This new equipment would require maintenance costs of $99,000 at the end of the fifth year. The cost of capital is 9%. Click here to view the factor 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 0 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 Wildhorse should purchase the new machine to replace the existing machine?
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 4P
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Question
am.147.
Transcribed Image Text:Wildhorse Inc. manufactures snowsuits. Wildhorse 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, Wildhorse spent $55,000 to keep it operational.
The existing sewing machine can be sold today for $245,090. 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
$389,800
2
399,800
3
410,200
4
425,400
5
432,400
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 $380,800. This new equipment would require maintenance costs of $99,000 at the end of the fifth year. The cost of
capital is 9%.
Click here to view the factor 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 0 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 Wildhorse should purchase the new machine to replace the existing machine?
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