Thread: Net Present Value Method

1. Net Present Value Method

My problem is as follow:

Vorteck Inc. manufactures snowsuits. Vorteck is considering purchasing a new sewing machine at a cost of $2.5 million. Its existing machine was purchased five years ago at a price of$1.8 million; six months ago, Vorteck 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 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 $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%. Instructions Calculate the net present value. (If net present value is negative enter with either a (-) sign preceding the number or (parenthesis) around the number. Round computations and final answer for present value to 0 decimal places, e.g. 125. Round computations for Discount Factor to 5 decimal places.) $Should Vorteck purchase the new machine to replace the existing machine? I thought I had this all figured out but I don't. I was going to use and add the cash flow amount on the top and use (1 +0.09)^0 for T =0 and so on for the following years in order to get the present value for each year. However, as I continued into this problem I got more and more lost. Please help me as I don't understand this assignment. 2. 1.8 Million plus 55K is sunk cost thus we do not include this in our calculations Initial Costs Cost of Machinery =$-2,500,000
Training Costs = $-85,000 Proceeds from sale of Old Machine =$260,000

Initial Cash Flow CF0 = $-2,325,000 Interim Cash Flows$390,000 $400,000$411,000 $426,000$434,000 $435,000 Teminal Cash Flow =$436,000 + $380,000 =$816,000

Free Net Cash Flows are

-2325000 390000 400000 411000 426000 434000 435000 816000

Your Cost of Capital is 9%

NPV = \$-23,547

The answer was arrived at using this online NPV Calculator

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