Vandelay Industries is considering the purchase of a new machine for the product
ID: 2762200 • Letter: V
Question
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,066,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $210,000 per year. Machine B costs $5,256,000 and will last for nine years. Variable costs for this machine are 35 percent of sales and fixed costs are $145,000 per year. The sales for each machine will be $10.4 million per year. The required return is 11 percent, and the tax rate is 30 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 EAC for each machine.
Calculate the EAC for each machine.
Explanation / Answer
Machine A
Machine B
Time line 0 1 2 3 4 5 6 Cost of equipment -3066000 =Initial Investment outlay -3066000 Revenues- variable cost -fixed cost 6030000 6030000 6030000 6030000 6030000 6030000 -Depreciation = Cost of equipment/6 -511000 -511000 -511000 -511000 -511000 -511000 = 5519000 5519000 5519000 5519000 5519000 5519000 -taxes =(cost- depreciation)*(1-tax) 3863300 3863300 3863300 3863300 3863300 3863300 +Depreciation 511000 511000 511000 511000 511000 511000 =after tax operating cash flow 4374300 4374300 4374300 4374300 4374300 4374300 Discount rate= 11% Total Cash flow for the period -3066000 4374300 4374300 4374300 4374300 4374300 4374300 Discount factor =(1+discount rate)^n 1 1.11 1.2321 1.367631 1.51807 1.685058 1.870415 Discounted cash flows -3066000 3940811 3550280 3198450 2881487 2595934 2338679 NPV= Sum of discounted cash flows 15439642 EAC = 6318103.30 6318103 6318103 6318103 6318103 6318103 6318103 Discounted EAC 5691985 5127914 4619743 4161930 3749487 3377916 Sum of discounted EAC=NPV= 15439642Related Questions
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