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 $242,598. 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 |
|
400,500 |
|
|
3 |
|
410,900 |
|
|
4 |
|
425,400 |
|
|
5 |
|
433,000 |
|
|
6 |
|
434,500 |
|
|
7 |
|
436,800 |
|
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 $379,500. This new equipment would require maintenance costs of $98,300 at the end of the fifth year. The cost of capital is 9%. (Refer the below table)
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. Round for Discount Factor to 5 decimal places, e.g. 0.17986.)
a. Calculate the net present value.
| Net present value |
|
$ |
|
b. Should Hiland Inc. purchase the new machine to replace the existing machine?