Hiland Inc. manufactures snowsuits. Hiland is considering purchasing a new sewin
ID: 2480746 • Letter: H
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 $260,000. 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
2 400,000
3 411,000
4 426,000
5 434,000
6 435,000
7 436,000
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 $350,000. This new equipment would require maintenance costs of $100,000 at the end of the fifth year. The cost of capital is 9%.
Investment in new equipment
Disposal of old equipment
Additional training required
Net initial investment required
Year
9% Discount
Amount
Present Value
Cash Flows
1
2
3
4
5
6
7
Maintenance
5
Net Cash Flows from Operations:
2,028,586
Salvage. Val.
7
Present value of cash inflows
Net present value
Based on the net present calculation alone, the sewing machine should or should not be purchased.
Investment in new equipment
Disposal of old equipment
Additional training required
Net initial investment required
Explanation / Answer
NPV is lower than Investment amount, hence new sewing machine should not be purchased
Investment in new equipment 2450000 Disposal of old equipment -260000 Additional training required 85000 Net initial investment required 2275000Related Questions
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