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 $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%.



(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.

Explanation / Answer

Net Present value Cash Out flow Operating Cost+Profit due to Depriciation Net Cash Flow NPV Year 0        -2,535,000        -2,535,000      -2,535,000 Year 1 803320             803,320          736,991 Year 2 730956             730,956          615,231 Year 3               674,945             674,945          521,181 Year 4               637,376             637,376          451,533 Year 5 -94300               601,701             507,401          329,776 Year 6               570,801             570,801          340,350 Year 7               545,080             545,080          298,178 NPV          758,239 Deprication Calculation Purchase value         2,450,000 Salvage Value            380,900 Net Value         2,069,100 Opening Value Depriciation Closing Value Year 1         2,069,100               413,820          1,655,280 Year 2         1,655,280               331,056          1,324,224 Year 3         1,324,224               264,845          1,059,379 Year 4         1,059,379               211,876             847,503 Year 5            847,503               169,501             678,003 Year 6            678,003               135,601             542,402 Year 7            542,402               108,480             433,922

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