Use the net present value method to determine the following: (If net present val

ID: 2496998 • Letter: U

Question

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. Round for Discount Factor to 5 decimal places, e.g. 0.17986.)

a. Calculate the net present value.

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 $243,736. 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 $389,600 2400,600 3 410,500 4425,200 5 433,300 6 435,200 7 437,300 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 $379,100 This new equipment would require maintenance costs of $99,300 at the end of the fifth year. The cost of capital is 9%. (Refer the below table)

Explanation / Answer

Computing the initial investment outlay of a replacement project is slightly different. This is primarily because of the expected cash flow a company may receive on the sale of the equipment to be replaced.

Value of the old machine = Sale Value + tax benefit/loss
= $243736
(Being no Tax rate is mentioned in the query, we consider nil tax benefits)

We shall not consider the historical value of old machine as well the $55,000 overhaul charges spent, being historical cost shall not affect the future decisions.

Net Present Value Calculation:

Year

Operating Cost Reduction (inflow)

Salvage Value (inflow)

Purchases Cost (Outlow)

Training Cost (Outflow)

Maintenance Cost (Outflow)

Net cash Flows (B+C-D-E-F)

Discounting Factor @

Net Present Value of Cash Flows (GXH)

$243,736.00

$2,450,000.00

$85,000.00

$ -2,291,264.00

1.00000

$-2,291,264.00

$ 389,600.00

0.91743

$ 357,431.19

$ 400,600.00

0.84168

$ 337,177.01

$ 410,500.00

0.77218

$ 316,981.32

$ 425,200.00

0.70843

$ 301,222.40

$ 433,300.00

$99,300.00

$ 334,000.00

0.64993

$ 217,077.08

$ 435,200.00

0.59627

$ 259,495.54

$ 437,300.00

$379,100.00

$ 816,400.00

0.54703

$ 446,598.76

$-55,280

Note: Being the Tax Rate is not provided, we have not able to consider the depreciation and loss on sale benefits in the query.