Vandalay Industries is considering the purchase of a new machine for the product
ID: 2560752 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,190,000 and will last for six years. Variable costs are 34 percent of sales, and fixed costs are $124,000 per year. Machine B costs $4,740,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $105,000 per year. The sales for each machine will be $9,480,000 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. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) Machine A NPV: $_______________ Machine B NPV: $_______________ Calculate the EAC for each machine. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places. (e.g., 32.16)) Machine A EAC: $_______________ Machine B EAC: $_______________ Which machine should you choose? Machine A Machine B Please show work for credit.
Explanation / Answer
Machine A is chosen, as it has greater EAC
Machine A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Initial investment (21,90,000) Annual cash flows: Revenue 94,80,000 94,80,000 94,80,000 94,80,000 94,80,000 94,80,000 Variable costs (32,23,200) (32,23,200) (32,23,200) (32,23,200) (32,23,200) (32,23,200) Fixed costs (1,24,000) (1,24,000) (1,24,000) (1,24,000) (1,24,000) (1,24,000) Depreciation (3,65,000) (3,65,000) (3,65,000) (3,65,000) (3,65,000) (3,65,000) Profit before tax 57,67,800 57,67,800 57,67,800 57,67,800 57,67,800 57,67,800 Tax@ 35% (20,18,730) (20,18,730) (20,18,730) (20,18,730) (20,18,730) (20,18,730) Profit after tax 37,49,070 37,49,070 37,49,070 37,49,070 37,49,070 37,49,070 Add: Depreciation 3,65,000 3,65,000 3,65,000 3,65,000 3,65,000 3,65,000 Cash flow after tax 41,14,070 41,14,070 41,14,070 41,14,070 41,14,070 41,14,070 Net cash flow (21,90,000) 41,14,070 41,14,070 41,14,070 41,14,070 41,14,070 41,14,070 Discount rate@ 10.00% 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 Discounted cash flow (21,90,000.00) 37,40,063.64 34,00,057.85 30,90,961.68 28,09,965.17 25,54,513.79 23,22,285.26 NPV 1,57,27,847 Annuity factor(6years,10%) 4.3553 EAC 36,11,230 29.84Related Questions
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