This company is considering purchasing a new sewing machine

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Reference no: EM13601043

A company manufactures snowsuits. This company is considering purchasing a new sewing machine at a cost of $2.5 million. Its existing sewing machine was purchased 5 years ago at a price of $1.8 million. Six months ago, the company 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 from year 1 to 7:

Year 1: $390,000
Year 2: $400,000
Year 3: $411,000
Year 4: $426,000
Year 5: $434,000
Year 6: $435,000
Year 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 if the company should purchase the new machine to replace the existing machine and state the reason for your conclusion.

Reference no: EM13601043

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