Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,048,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $195,000 per year. Machine B costs $5,229,000 and will last for nine years. Variable costs for this machine are 35 percent and fixed costs are $130,000 per year. The sales for each machine will be $10.1 million per year. The required return is 11 percent and the tax rate is 30 percent. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the NPV for each machine.

Calculate the EAC for each machine.

Which machine should you choose?

Answer 1

Solution :

The EAC of Machine A = - $ 3,532,575.77

The EAC of Machine B = - $ 3,335,566.10

Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.