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 $239,791. 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 $380,900. This new equipment would require maintenance costs of $94,100 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.

Should Hiland Inc. purchase the new machine to replace the existing machine

Year 1 $389,900 2 399,200 3 410,600 4 425,400 5 433,400 6 434,800 7 437,800

Explanation / Answer

Investment in new equipment = $2,450,000

Disposal of old equipment = (239,791)
Additional training required = 85,000

Net initial investment required= $ 2295209

Based on the net present calculation alone, the sewing machine should not be purchased. However, the internal rate of return would be only slightly lower than the 9% minimum required, so the company may want to look at some of the non-quantitative factors involved.

Year Present value factor (9%) Amount Present value Cashflow 1 389900 0.917431 357706.42 2 399200 0.84168 335998.65 3 410600 0.772183 317058.54 4 425400 0.708425 301364.08 5 433400 0.649931 281680.26 6 434800 0.596267 259257.03 7 437800 0.547034 239491.59 Maintenance cost 5 0.6499 -94100 -61155.59 Terminal salvage 7 0.547 380900 208352.30 Present vlaue of cash inflows 2239753.30 Less- Initial investment 2295209.00 NET PRESENT VALUE -55455.70

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