Exercise 26-3 Hiland Inc. manufactures snowsuits. Hiland is considering purchasi
ID: 2488162 • Letter: E
Question
Exercise 26-3
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 $242,584. 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:
b. Should Hiland Inc. purchase the new machine to replace the existing machine?
Explanation / Answer
a.
Calculation of net present value:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Cost of New Machine
$ (2,450,000.00)
Training Cost for New Machine
$ (85,000.00)
Sale Value of Old Machine
$ 242,584.00
Saving in Operating Costs
$ 389,900.00
$ 399,300.00
$ 410,400.00
$ 425,400.00
$ 433,400.00
$ 435,400.00
$ 436,700.00
Salvage Value of Machine at the end
$ 380,700.00
Maintenance costs
$ (96,100.00)
Net Cash Flows (CF)
$ (2,292,416.00)
$ 389,900.00
$ 399,300.00
$ 410,400.00
$ 425,400.00
$ 337,300.00
$ 435,400.00
$ 817,400.00
Discount Factor (F) (9%)
1.00000
0.91743
0.84168
0.77218
0.70843
0.64993
0.59627
0.54703
PV = CF*F =
$ (2,292,416.00)
$ 357,705.96
$ 336,082.82
$ 316,902.67
$ 301,366.12
$ 219,221.39
$ 259,615.96
$ 447,142.32
Net Present value = Sum of PVs =
$ (54,379)
b.
The Net present value of the replacement proposal is negative , hence:
Hiland Inc. should not purchase the new machine to replace the existing machine.
a.
Calculation of net present value:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Cost of New Machine
$ (2,450,000.00)
Training Cost for New Machine
$ (85,000.00)
Sale Value of Old Machine
$ 242,584.00
Saving in Operating Costs
$ 389,900.00
$ 399,300.00
$ 410,400.00
$ 425,400.00
$ 433,400.00
$ 435,400.00
$ 436,700.00
Salvage Value of Machine at the end
$ 380,700.00
Maintenance costs
$ (96,100.00)
Net Cash Flows (CF)
$ (2,292,416.00)
$ 389,900.00
$ 399,300.00
$ 410,400.00
$ 425,400.00
$ 337,300.00
$ 435,400.00
$ 817,400.00
Discount Factor (F) (9%)
1.00000
0.91743
0.84168
0.77218
0.70843
0.64993
0.59627
0.54703
PV = CF*F =
$ (2,292,416.00)
$ 357,705.96
$ 336,082.82
$ 316,902.67
$ 301,366.12
$ 219,221.39
$ 259,615.96
$ 447,142.32
Net Present value = Sum of PVs =
$ (54,379)
b.
The Net present value of the replacement proposal is negative , hence:
Hiland Inc. should not purchase the new machine to replace the existing machine.
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