Vandalay Industries is considering the purchase of a new machine for the product
ID: 2615857 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,980,000 and will last for 5 years. Variable costs are 39 percent of sales, and fixed costs are $153,000 per year. Machine B costs $4,320,000 and will last for 8 years. Variable costs for this machine are 29 percent of sales and fixed costs are $110,000 per year. The sales for each machine will be $8.64 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) (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)Explanation / Answer
Variable cost = 39% of 8640000 * 1.1 (1.1 is cosidering 10% return on perpetual basis)
Fixed cost is given,
Depriciation is 1980000/5 for project A since it is straight line depriciation similarly for project B it is 4320000/8
NPV of A = -1980000 -2370114* present vaule of annuity for next 5 year at 10% rate of retrun
= -1980000 - 2370114*(1 - 1.1^(-5))/.1
= -1980000 - 8984596.79
= -$10964596.79
EAC of A = -10964596.79 * .1/(1 - 1.1^(-5))
= -$2892433.01
NPV of B = -4320000 -1674004 * (1-1.1^(-8))/.1
= -4320000 - 8930687.79
= -$13250687.79
EAC of B = -13250687.79 * .1 / (1- 1.1^(-8))
= -$2483762.155
Machine A Machine B Variable Cost -3706560 -2756160 Fixed Cost -153000 -110000 Depreciation -396000 -540000 EBT -4255560 -3406160 Tax 1489446 1192156 Net income -2766114 -2214004 Depreciation 396000 540000 Operating Cash Flow -2370114 -1674004Related Questions
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