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

Question

Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,054,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $200,000 per year. Machine B costs $5,238,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $135,000 per year. The sales for each machine will be $10.2 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. The company plans to replace the machine when it wears out on a perpetual basis.

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Explanation / Answer

machine A machine B variable costs 3570000 3060000 fixed costs 200000 135000 depreciation 509000 582000 EBT 4279000 3777000 tax 1497650 1321950 Net Income 2781350 2455050 LESS DEP 509000 582000 OCF 2272350 1873050 . machine A machine B NPV -$3054000 - $2272350(PVIFA10%,6) - $5238000 - $1873050(PVIFA10%,9) PV Factor 4.3553 5.7590 NPV $                                              1,29,50,676.65 $                                                1,60,24,939.56 EAC NPV/Pv Factor 2973571 2782579 You should choose machine B since it has a less negative EAC.

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