Hiland Inc. manufactures snowsuits. Hiland is considering purchasing a new sewin

Question

Hiland Inc. manufactures snowsuits. Hiland 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, Hiland spent $55,000 to keep it operational. The existing sewing machine can be sold today for $243,191. 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:

b. Should Hiland Inc. purchase the new machine to replace the existing machine?

Year 1 $390,200 2 400,600 3 410,400 4 425,800 5 432,300 6 435,400 7 437,900 TABLE 4 Present Value of an annuity of 1 (n) Payments 4% 5% Bo 99% 10% 11% 12% 15% 96154 95238 .94340 0.9345892593 9174390909 90090 .89286 .86957 1.88609 1.85941 1.83339 1.80802 178326 1.75911173554171252 1.69005 1.62571 2.77509 2.72325 2.67301262432257710253130 2.48685 2.44371 2.40183228323 3.62990 3.54595346511 3.38721 3.31213 3.23972 3.16986 3.10245 3.03735 2.85498 4.45182 4.32948 4.21236 4.10020 3.99271 3.88965 3.79079369590 3.60478 3.35216 5.24214 14507569 4.91732 4.76654462288448592 4.35526 4.23054 4.11141 3.78448 10 6.00205578637 5.58238538929 5.20637503295 4.86842 4.71220 4.56376 4.16042 6.73274646321 6.20979 5.97130 5.74664 5.53482 5.33493514612496764 4.48732 7.43533 7.10782 6.80169 6.51523 6.24689 5.99525 5.75902 5.53705 5.32825477158 8.11090 7.72173 7.36009 7.02358671008 6.41766 6.14457 5.88923565022 5.01877 11 12 13 8.76048 8.30641 7.88687 7.49867713896680519 6.49506620652 5.93770 5.23371 9.38507886325838384 7.94269 7.53608716073 6.81369649236 6.19437542062 9.98565 9.39357 8.85268 8.35765790378 7.48690 7.10336 6.74987 6.42355558315 14 10.56312 9.89864929498 8.74547824424 7.78615 7.36669698187 6.62817572448 11.11839 10.37966 9.71225 9.10791 8.55948 8.06069 7.60608 7.19087 6.81086 5.84737 16 11.65230 10.83777 10.10590 9.44665 8.85137831256 7.82371 7.37916697399 5.95424 17 12.16567 11.2740710.47726 9.76322912164854363 8.02155 7.54879 7.11963 6.04716 18 19 20 12.65930 11.68959 10.82760 10.05909 9.37189875563 8.20141770162724967 6.12797 13.13394 12.08532 11.15812 10.33560 9.60360 8.95012 8.36492 7.83929 7.36578 6.19823 13.59033 12.46221 11.46992 10.59401981815 9.12855 8.51356 7.96333746944 6.25933

Explanation / Answer

Calculation of NPV

Cash Flow: as there is decrease in operating cost so there is increase in cash flow as we are saving that money

NPV = {Net Period Cash Flow/(1+R)^T} - Initial Investment

where R is the rate of return and T is the number of time periods. USD$

Discounted cash=

Cash Flow/Dis Rate

Total Discounted Cash Flow 1952583

Intial Investment 2400000

NPV=1952583-2400000= $(447417)

b) As NPV is negative new machine should not be purchased

Year Cash Flow Dis Rate

Discounted cash=

Cash Flow/Dis Rate

1 390200-85000(training cost) 9%(1/1.09)^1) .91743 280000 2 400600 1.1881 337177 3 410400 1.295 316911 4 425800 1.416 300706 5 432300-97700maintainence cost) 1.538 217555 6 435400 1.677 259630 7 437900 1.82 240604

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