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 $242,045. 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 | $389,500 | ||
2 | 399,900 | |||
3 | 410,100 | |||
4 | 425,500 | |||
5 | 432,200 | |||
6 | 435,200 | |||
7 | 436,600 |
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 $94,300 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 | $ |
Should Hiland Inc. purchase the new machine to replace the existing machine?
Particular | Amount in $ |
new sewing machine at a cost of | 2,450,000 |
existing sewing machine can be sold today |
-242045 |
Training Cost | 85000 |
New Machine cost | 2292955 |
Year | Cash flow |
Maintainance cost |
Salvage Value |
NetCash Flow | PV factor @9% | Prasent Value |
0 | -2292955 | -2292955 | 1 | -2292955 | ||
1 | 389500 | 389500 | 0.91743 | 357339.4495 | ||
2 | 399900 | 399900 | 0.84168 | 336587.8293 | ||
3 | 410100 | 410100 | 0.77218 | 316672.4452 | ||
4 | 425500 | 425500 | 0.70843 | 301434.9273 | ||
5 | 432200 | -380900 | 51300 | 0.64993 | 33341.48012 | |
6 | 435200 | 435200 | 0.59627 | 259495.5407 | ||
7 | 436600 | 94300 | 530900 | 0.54703 | 290420.4806 | |
-397662.847 |
1 NPV of the new Machine is -397662.847
2
Should Hiland Inc. purchase the new machine to replace the existing machine?
Answer : NO ,comapany should not purchase the new machine as NPV is negative