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 $240,687. 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 $390,400 2 400,300 3 410,400 4 425,700 5 432,200 6 435,000 7 437,400 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 $379,200. This new equipment would require maintenance costs of $95,400 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?

Answer 1