Exercise 24-3 Open Show Work Exercise 24-3 Hiland Inc. manufactures snowsuits. H

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Exercise 24-3

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Exercise 24-3

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 $240,921. 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 $390,000 2 399,600 3 410,700 4 425,100 5 433,400 6 435,300 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 $379,700. This new equipment would require maintenance costs of $96,000 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?
YesNo Click if you would like to Show Work for this question:

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Explanation / Answer

Investment In Sewing machine 2450000 Sale of old equipment   -240,921 Training cost 85,000 Net initial investment required   $2,294,079 Year PV factor @ 9% Amount PV cash flow 1                                                        0.92 390000            357,798 2                                                        0.84 399600            336,335 3                                                        0.77 410700            317,136 4                                                        0.71 425100            301,152 5                                                        0.65 433400            281,680 6                                                        0.60 435300            259,555 7                                                        0.55 437300            239,218         2,092,874 Maintenance-5th year                                                        0.65 -96000            (62,393) Net cash flow from operation         2,030,481 Add : Salvage value at the end-7th year                                                        0.55 379700 $207,709 Present value of Cash flow         2,238,190 Less intial investment $2,294,079 NPV            (55,889) NO , should not putrchase new machine as NPV is negative

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