1)Vandalay Industries is considering the purchase of a new machine for the produ
ID: 2623108 • Letter: 1
Question
1)Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,280,000 and will last for 3 years. Variable costs are 39 percent of sales, and fixed costs are $135,000 per year. Machine B costs $4,320,000 and will last for 5 years. Variable costs for this machine are 31 percent of sales and fixed costs are $83,000 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.
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.)
1)Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,280,000 and will last for 3 years. Variable costs are 39 percent of sales, and fixed costs are $135,000 per year. Machine B costs $4,320,000 and will last for 5 years. Variable costs for this machine are 31 percent of sales and fixed costs are $83,000 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.
Explanation / Answer
PARTICULARS
0
1
2
3
Initial Investment
-2280000
Sales
8640000
8640000
8640000
(-) Variable Cost
-3369600
-3369600
-3369600
(-) Fixed Cost
-135000
-135000
-135000
(-) Depreciation
-760000
-760000
-760000
Profit Before Tax
4375400
4375400
4375400
(-) Tax @ 35%
-1531390
-1531390
-1531390
Net Income
2844010
2844010
2844010
(+) Depreciation
760000
760000
760000
Net Cash Flow
-2280000
3604010
3604010
3604010
EAC = NPV(10%)/PVA(10%,3)
= [-2280000 + 3604010*PVA(10%,3)] / PVA(10%,3)
= [-2280000 + 3604010*2.4869] / 2.4869
= 2,687,188
PARTICULARS
0
1
2
3
Initial Investment
-2280000
Sales
8640000
8640000
8640000
(-) Variable Cost
-3369600
-3369600
-3369600
(-) Fixed Cost
-135000
-135000
-135000
(-) Depreciation
-760000
-760000
-760000
Profit Before Tax
4375400
4375400
4375400
(-) Tax @ 35%
-1531390
-1531390
-1531390
Net Income
2844010
2844010
2844010
(+) Depreciation
760000
760000
760000
Net Cash Flow
-2280000
3604010
3604010
3604010
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