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 $244,208. 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: Year 1 $389,400 2 399,200 3 410,400 4 425,000 5 432,800 6 435,100 7 437,700 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 $380,800. This new equipment would require maintenance costs of $98,100 at the end of the fifth year. The cost of capital is 9%.

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 $

Please show work for achieved answer

Explanation / Answer

Answer:

Note:

1. Since, tax rate is not given we ignore depreciation for Cash Flow Calculations.

2. Cost of old machine and its rpairing cost are sunk cost and not considered for NPV Calculations.

Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outflows = $ 2,235,916 - 2,290,792 = - $ 54,876

Since, NPV is negative, the proposal should not be accepted.

Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Initial Cash Outflow (2,450,000) Nil Nil Nil Nil Nil Nil Nil Cash Inflow from sale of existing machine 244,208 NIl Nil Nil Nil Nil Nil Nil Ontime Training Cost Outflow (85,000) Nil Nil Nil Nil Nil Nil Nil Net Initial Outflow (2,290,792) Nil Nil Nil Nil Nil Nil Nil Decrease in Annual Operating Costs (Inflows) Nil 389,400 399,200 410,400 425,000 432,800 435,100 437,700 Repair Cost Nil Nil Nil Nil Nil (98,100) Nil Nil Salvage Value Nil Nil Nil Nil Nil Nil Nil 380,800 Net Cash Inflows Nil 389,400 399,200 410,400 425,000 334,700 435,100 818,500 Discount Factor@9% 1 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470 Present Value of Cash Inflows Nil 357,236 336,007 316,911 301,070 217,522 259,450 447,720 Total Present Value of Cash Inflows 2,235,916

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