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: Year 1 $390,200 2 400,600 3 410,400 4 425,800 5 432,300 6 435,400 7 437,900

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 $379,200. This new equipment would require maintenance costs of $97,700 at the end of the fifth year. The cost of capital is 9%. (Refer the below table)



Use the net present value method to determine the following: (If net present value is negative then enter with negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer for present value to 0 decimal places, e.g. 125. Round for Discount Factor to 5 decimal places, e.g. 0.17986.)

a. Calculate the net present value. Net present value $

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

Explanation / Answer

Answer

a)

Net present value = - $ 54038

b)

No Hiland Inc. should not purchase the new machine to replace the existing machine as its NPV is negative

Working

Assuming no taxes

Year 0 1 2 3 4 5 6 7 Operating costs would decrease by 0 390200 400600 410400 425800 432300 435400 437900 New Machine -2450000 0 0 0 0 0 0 0 Training Cost -85000 0 0 0 0 0 0 0 Sale of Existing Machine 243191 0 0 0 0 0 0 0 Salavage Value 0 0 0 0 0 0 0 379200 Maintenance Cost 0 0 0 0 0 -97700 0 0 Cash Flow -2291809 390200 400600 410400 425800 334600 435400 817100 PV Factor @ 9% 1.00000 0.91743 0.84168 0.77218 0.70843 0.64993 0.59627 0.54703 Present Value         (2,291,809)                      357,981          337,177          316,903          301,649          217,467          259,616          446,978 Net Present Value               (54,038)

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