Sheep Counting Gone, Inc. is considering the purchase of a new machine for the p

Question

Sheep Counting Gone, Inc. is considering the purchase of a new machine for the production of next-generation memory foam. Machine A costs $3,054,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $200,000 per year. Machine B costs $5,238,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $135,000 per year. The sales for each machine will be $10.2 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. Note: Since we need to calculate the EAC for each machine, sales are irrelevant. EAC only uses the costs of operating the equipment, not the sales. calculate the NPV and EAC for machine A and B

Explanation / Answer

Solution.

For machine A

NPV

EAC is

For machine B.

NPV is

EAC is.

Year Cash Flow Table Value PV 0 (3,054,000.00) 1.0000      (3,054,000.00) 1 to 6 Year (1,999,833.00) 4.3553      (8,709,872.66) NPV (11,763,872.66)

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