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%.

Click here to view the factor table.

(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?

Year 1 $389,500 2 399,900 3 410,100 4 425,500 5 432,200 6 435,200 7 436,600

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 Yes Co. should purchase the new macine to replace the existing machine 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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