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

1 NPV of the new Machine is -397662.847

2

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

Answer : NO ,comapany should not purchase the new machine as NPV is negative

Particular Amount in $ new sewing machine at a cost of                2,450,000 existing sewing machine can
be sold today -242045 Training Cost 85000 New Machine cost 2292955

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