Vandalay Industries is considering the purchase of a new machine for the product
ID: 2552149 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,114,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $255,000 per year. Machine B costs $5,328,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $190,000 per year. The sales for each machine will be $11.3 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.
Calculate the NPV for each machine. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Calculate the EAC for each machine. (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Explanation / Answer
1.NPV CALCULATION
Machine A
Machine B
Sales
11300000
11300000
Less Variable cost
3955000
3955000
Fixed Cost
255000
190000
Less:Depreciation
519000
592000
Profit Before Tax
6571000
6563000
Less Taxation@35%
2299850
2297050
Profit After Tax
4271150
4265950
Add Back Depreciation
519000
592000
Cash Flow
4790150
4857950
Depreciation Machine A = 3114000/6 = 519000
Depreciation Machine B = 5328000 / 9 = 592000
NPV Machine A = - 3114000 + 4790150(PVAF 10%,6 Years)
= - 3114000 + (4790150 x 4.3553)
= - 3114000 + 20862540
NPV Machine A = $ 1,77,48,540
NPV Machine B = - 5328000 + 4857950(PVAF 10%,9 Years)
= - 5328000 + (4857950 x 5.7590)
= - 5328000 + 27976934
NPV Machine B = $ 2,26,48,934
NPV MACHINE A = $ 1,77,48,540
NPV MACHINE B = $ 2,26,48,934
2.EAC CALCULATION
EAC Machine A = $ 3114000 / 4.3553
= $ 7,14,991
EAC Machine B = $ 5328000 / 5.7590
= $ 9,25,161
EAC Machine A = $ 7,14,991
EAC Machine B = $ 9,25,161
Machine A
Machine B
Sales
11300000
11300000
Less Variable cost
3955000
3955000
Fixed Cost
255000
190000
Less:Depreciation
519000
592000
Profit Before Tax
6571000
6563000
Less Taxation@35%
2299850
2297050
Profit After Tax
4271150
4265950
Add Back Depreciation
519000
592000
Cash Flow
4790150
4857950
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.