Alpine Clothing manufactures snowsuits. Alpine 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, Alpine 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. Cash 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 residual 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 Alpine should purchase the new machine to replace the existing machine, and state the reason for your conclusion.