Question

Vandelay Industries is considering the purchase of a new machine for producing

latex. Machine A costs $2,600,000 and will last for six years. Variable costs are

35% of sales and fixed costs are $195,000 per year. Machine B costs $5,200,000

and will last for 9 years. Variable costs for this machine are 30% of sales and

fixed costs are $230,000 per year. The sales for each machine will be $10 mil

per ear. The required return is 10% and the tax rate = 35%. Both machines will

be depreciated on a straight-line basis. If the company plans to replace the

machine when it wears out on a perpetual basis, which machine should it

choose?

Answer 1

	Machine A	Machine B
Variable Cost	-3500000	-3000000
Fixed Ocst	-195000	-230000
Depreciation	-433333	-577778
EBT	-4128333	-3807778
TAX	-1444916.55	-1332722.3
Net Income	-2683416.45	-2475055.7
Depreciation	433333	577778
OCF	-2250083.45	-1897277.7

NPVMachineA=-2600000-2250083(PVIFA10$6)

NPVMachineA=-2600000-2250083*4.35526

NPVMachineA=-12399699.51

EACA=12399699.51/(PVIFA10$6)

EACA=12399699.51/4.35526

EACA=-2847062.52

NPVMachineA=-5200000-1897278(PVIFA10$6)

NPVMachineA=-5200000-1897278*4.35526

NPVMachineA=-16126467.91

EACA=16126467.91/(PVIFA10$6)

EACA=16126467.91/4.35526

EACA=-2800208.58

Select Machine B since it has most Postive EAC