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 $ 250,000. 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 $ 400,000. This new equipment would require maintenance costs of $ 100,000 at the end of the fifth year. The cost of capital is 9 %.
Instructions
Use the net present value method to determine whether Hillsong should purchase the new machine to replace the existing machine, and state the reason for your conclusion.
E12-5
Bruno Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $ 430,000. The company believes that