Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,810,000 and will last for 4 years. Variable costs are 34 percent of sales, and fixed costs are $147,000 per year. Machine B costs $4,380,000 and will last for 7 years. Variable costs for this machine are 30 percent of sales and fixed costs are $77,000 per year. The sales for each machine will be $8.76 million per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis.

  

Required:

(a)	If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A? (Do not round your intermediate calculations.)
	(Click to select)$-3,498,978.25$-7,747,585.91$-3,867,291.75$3,249,862.85$-2,444,137.15

  

(b)	If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B? (Do not round your intermediate calculations.)

Answer 1

Annual Operating cashflows
			machineA	machineB
Annual sales revenue			8760000	8760000
Less: Variable cost			2978400	2628000
Less: Fixed cost			147000	77000
Less: Depreciation			452500	625714.3
			(1810000/4)	(4380000/7)
Before tax income			5182100	5429286
Less: tax @ 35%			1813735	1900250
After tax Income			3368365	3529036
Add: Dep			452500	625714.3
Annual operating cashflows			3820865	4154750
Multiply: Annuity PVF			3.16987	4.86842
Present value of inflows			12111645.3	20227068
Less: Investment			1810000	4380000
Net Present value			10301645.3	15847068
Divide: Annuity PVF			3.16987	4.86842
EAC			3249863.67	3255074