Vandelay Industries is considering the purchase of a new machine for the product
ID: 2776363 • Letter: V
Question
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,048,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $195,000 per year. Machine B costs $5,229,000 and will last for nine years. Variable costs for this machine are 35 percent of sales and fixed costs are $130,000 per year. The sales for each machine will be $10.1 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. (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,048,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $195,000 per year. Machine B costs $5,229,000 and will last for nine years. Variable costs for this machine are 35 percent of sales and fixed costs are $130,000 per year. The sales for each machine will be $10.1 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.
Explanation / Answer
Answer
We First Need to Calculate NPV for both the machines
NPV for Machine A = CFAT * PV Annuity Factor for 6 years@11% - (initial Cash Outflow)
= (4257900 * 4.23) - (3048000)
= 18013207.13 - 3048000
= 14965207.13
EAC = (14965207.13)/4.23
= (3537424.23)
NPV for Machine B = (CFAT * PV Annuity Factor @11% for 9 years ) - initial cash outflow
= (4678800*5.54) - (5229000)
= 20677738 - 5229000
= 15,448,738
EAC for machine B = (15448738) / 5.54
= (2,790,067.69)
Particulars Machine A Machine B Sales 10,100,000.00 10,100,000.00 Less Variable Costs 4,040,000.00 3,535,000.00 Depreciation 508,000.00 581,000.00 Fixed Costs 195,000.00 130,000.00 PBT 5,357,000.00 5,854,000.00 Less: Tax 1,607,100.00 1,756,200.00 PAT 3,749,900.00 4,097,800.00 Add : Depreciation 508,000.00 581,000.00 CFAT 4,257,900.00 4,678,800.00Related Questions
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