oMaS ono Ps&Aut; connect FINANCE Chapter 10 Assignment Question 4 (of 4) 4. 10.0
ID: 2572453 • Letter: O
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oMaS ono Ps&Aut; connect FINANCE Chapter 10 Assignment Question 4 (of 4) 4. 10.00 points Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A osts $2,020,000 and will last for 4 years. Variable oosts are 39 percent of sales, and foxed costs are $169,000 per year. Machine B costs $4,570,000 and will last for 7 years. Variable costs for this machine are 27 percent of sales and foxed costs are $90,000 per year. The sales for each machine will be $9.14 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: prptual bsis, what i he EAC for machine A? (Do not round your intermediate calculations.) Click to select b) It 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.) Cick to select) Book&Resources; MacBook Air esc 20Explanation / Answer
Machine A Machine B initial cost 2020000 4570000 life 4 7 sales 9140000 variable cost% of sales 39 27 fixed cost 169000 90000 salvage 0 0 tax rate 35 35 discounting erate 10 10 calculations variable cost -3564600 -2467800 fixed cost -169000 -90000 total cost -3733600 -2557800 Less: Tax(total cost x tax rate -1306760 -895230 After tax operating cost -2426840 -1662570 Depriciation (initiak cost/ Life 505000 652857.14 Depreciation tax shield(dep x Tax rate 176750 228500 operating cash flows(after tax operating cost + deprreciation Tax shield -2250090 -1434070 thus operating cash flows for machine A and machine B are $-2250090 and $-1434070 respectively Step 2 calculate the PV of total cost for both machine Machine A (-2250090*3.1699)-2020000 -9152560.291 Machine B (-1434070*4.8684)-4570000 -11551626.39 Calculate EAC EAC=NPV/Annuity Factor Machine A so -9152560.291/3.1699 -2887334.077 Machine B So -11551626.39/4.8684 -2372776.682 So it is evidend that EAC of machine B is the least there fore cpmpany should purchase machine B
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