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 $242,057. 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 $379,700. This new equipment would require maintenance costs of $98,100 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.

NET PRESENT VALUE $____________________

Year 1 $390,500 2 400,700 3 411,000 4 425,600 5 432,500 6 434,700 7 437,700

Explanation / Answer

Net present value $55289

Cash out flow at 0 years

Net present value $55289

Cash out flow at 0 years

Cost of new machine 2450000 Less present value of old machine 242057 On time training cost 85000 Cash out flow $ 2,292,943.00 Year 1 2 3 4 5 6 7 Saving in operational cost $390,500 400700 411000 425600 432500 434700 437700 Salavage value 379700 Maintaince cost -98100 Cash inflow $390,500 $400,700 $411,000 $425,600 $334,400 $434,700 $817,400 Pvf @ 9% 0.917 0.842 0.772 0.708 0.65 0.596 0.547 Present value $358,088.50 $337,389.40 $317,292.00 $301,324.80 $217,360.00 $259,081.20 $447,117.80 $2,237,653.70 Net present value = cash inflow - cash outflow ($55,289.30)

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