Question

Riverbed Inc. manufactures snowsuits. Riverbed 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, Riverbed spent $55,000 to keep it operational. The existing sewing machine can be sold today for $242,828. 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 $389,400 2 399,000 410,800 425,200 433,400 6 434,500 7 437,600 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 $379,600. This new equipment would require maintenance costs of $95,600 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: Calculate the net present value. (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.) Net present value $ Should Riverbed purchase the new machine to replace the existing machine?

Answer 1

Calculation of net present value
cash out flow
			amount	factor	present value
cost of equpment-new			2450000	1	2450000
sale value of equipment-old			-242828	1	-242828
training cost			85000	1	85000
maintenance cost-new			95600	0.64993	62133.31
total cash present value of outflow					2354305
calculation of present value of cash inflow
operating cost decrease	amount	pv factor @9%	present value
1	389400	0.91743	357247.2
2	399000	0.84168	335830.3
3	410800	0.77218	317211.5
4	425200	0.70843	301224.4
5	433400	0.64993	281679.7
6	434500	0.59627	259079.3
7	437600	0.54703	239380.3
salvage value	379600	0.54703	207652.6
	present value of cash inflow		2299305
Net present value = present value of cash inflow-outflow
Net present value = 2299305-2354305
net present value =   -55000
Should not purchase the new machine to replace existing

Please give a thumbs up if it is helpful & let me know if any doubt