Hiland Inc. manufactures snowsuits. Hiland is considering purchasing a new sewin
ID: 2483485 • Letter: H
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 $242,045. 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:
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 $380,900. This new equipment would require maintenance costs of $94,300 at the end of the fifth year. The cost of capital is 9%.
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(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
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.)
Calculate the net present value.
Should Hiland Inc. purchase the new machine to replace the existing machine?
Explanation / Answer
Yearly Depreciation on the new Sewing Machinery on Declining Balance Method Net book Value at beginning Residual Value Book value after residual Value Depreiciation Rate Depreication Accumulated Depreciation Year 1 2,450,000 380,900 2,069,100 20% 413,820 413,820 Year 2 2,036,180 380,900 1,655,280 20% 331,056 827,640 Year 3 1,705,124 380,900 1,324,224 20% 264,845 1,158,696 Year 4 1,440,279 380,900 1,059,379 20% 211,876 1,423,541 Year 5 1,228,403 380,900 847,503 20% 169,501 1,635,417 Year 6 1,058,903 380,900 678,003 20% 135,601 1,804,917 Year 7 923,302 380,900 542,402 20% 108,480 1,940,518 Yearly Depreciation on the old Sewing Machinery as per Declining Balance Method Net book Value at beginning Residual Value Book value after residual Value Depreiciation Rate Depreication Accumulated Depreciation Year 1 1,800,000 1,800,000 20% 360,000 360,000 Year 2 1,440,000 - 1,440,000 20% 288,000 720,000 Year 3 1,152,000 - 1,152,000 20% 230,400 1,008,000 Year 4 921,600 - 921,600 20% 184,320 1,238,400 Year 5 737,280 - 737,280 20% 147,456 1,422,720 Year 6 589,824 - 589,824 20% 117,965 1,570,176 Year 7 471,859 - 471,859 20% 94,372 1,688,141 Depreciaiton on new Machinery calculated assumed there is no residual value and decling balance method Book value of Machinery at the year end 5 = $ 589824. Maint cost incurred six month ago including interest on this expenes = $ 55000 X ((55000 X 9%)/2)= $ 55000 +$2750 = $ 57750. As this incurred and not conituing the same and we don’t know how much benefit has been taken from this maintenance. Loss on Sale of machinery = $ 589824 + $57750 -$ 242045 = $ 405529 Calculation of NPV of New Machinery Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Initial Investment (2,450,000) Training Cost (85,000) Saving in Operating Cost 389500 399900 410100 425500 432200 435200 436600 Maint. Cost (94,300) Sale of Machinery 380900 Cash Flow (2,535,000) 389,500 399,900 410,100 425,500 337,900 435,200 817,500 Discount Factor @ 9% 1.000 0.917 0.842 0.772 0.708 0.650 0.596 0.547 Discounted Cash Flow (2,535,000) 357,339 336,588 316,672 301,435 219,612 259,496 447,200 (296,657) Net Present Value = $ 296657 negative No, old machine should not be replaced.
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