Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,950,000 and will last for 6 years. Variable costs are 38 percent of sales, and fixed costs are $169,000 per year. Machine B costs $4,720,000 and will last for 8 years. Variable costs for this machine are 32 percent of sales and fixed costs are $122,000 per year. The sales for each machine will be $9.44 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)$-2,775,514.39$-12,088,088.75$3,360,485.61$-4,063,891$-4,491,669

  

(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.)
	(Click to select)$3,414,944.24$-2,721,055.76$-8,201,078.83$-7,420,023.7$-14,516,631.68

Answer 1

EAC:
		machineA	machineB
Sales		9440000	9440000
Lless: VC		3587200	3020800
Less: Fixed cost		169000	122000.00
Less: Depreciation		325000	590000.00
		(1950000/6)	(4720000/8)
Net income before tax		5358800	5707200.00
Less: Tax @ 35%		1875580	1997520
After tax Income		3483220	3709680.00
Add: Depreciation		325000	590000.00
Annual Operating cashflows		3808220	4299680.00
Annuity PVF at 10%		4.35526	5.33493
Present value of inflows		16585788.2	22938492
Less: Investment		1950000	4720000
Net present value		14635788.2	18218492
Divide: Annuity PVF		4.35526	5.33493
EAC		3360485.54	3414944.9