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

Explanation / Answer

Cost of new machine                   = 2,450,000 sale price of old machine           = -242,057 additional training cost                =85,000 investment                                        =2,292,943 year amount discount factor PV 1 390,500 0.91743 358256.4 2 400,700 0.84168 337261.2 3 411,000 0.77218 317366 4 425,600 0.70843 301507.8 5 334,400 0.64993 217336.6 6 434,700 0.59627 259198.6 7 817,400 0.54703 447142.3 total 2238069 Net present value = 2,238,069-2,292,953 = 54,884

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