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 $241,919. 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 |
|
$389,400 |
|
|
2 |
|
399,100 |
|
|
3 |
|
410,400 |
|
|
4 |
|
425,100 |
|
|
5 |
|
433,200 |
|
|
6 |
|
435,000 |
|
|
7 |
|
437,900 |
|
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 $380,200. This new equipment would require maintenance costs of $95,500 at the end of the fifth year. The cost of capital is 9%
Calculate the net present value.
Should Hiland Inc. purchase the new machine to replace the existing machine?