Vandelay Industries is considering the purchase of a new machine for the product
ID: 2779477 • 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.
A) Calculate the EAC for machine A
B) Calculate the EAC for machine B
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:
To calculate EAC we need to calculate the total cost
EAC for machine A would be = 20964336.90/4.23 =
4956108.014
EAC for machine B would be =
4610569.62
Since EAC for machine B is lower therefore Machine B should be selected
Machine A Years Cost Pv factor Total NPV cost 0.00 3048000 1.00 3048000.00 1-6 years 4040000 4.23 17091381.60 1-6 years 195000.00 4.23 824955.30 NPV total Cost 20964336.90 Machine B Years Cost Pv factor Total NPV cost 0.00 5229000 1.00 5229000.00 1-9 years 3535000 5.53 19548550.00 1-9 years 130000.00 5.53 718900.00 NPV total Cost 25496450.00Related Questions
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