hiland inc manufactures snowsuits hiland is considering purcha 256099

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%.

Instructions

Use the net present value method to determine whether Hiland should purchase the new machine to replace the existing machine, and state the reason for your conclusion.

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