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E12-3 Hiland Inc. manufactures snowsuits

Price: $1.99


E12-3 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
a) Calculate the net present value
b) determine whether Hiland should purchase the new machine to replace the existing machine

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