Vandalay Industries is considering the purchase of a new machine for the product
ID: 2789162 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,100,000 and will last for 5 years. Variable costs are 34 percent of sales, and fixed costs are $129,000 per year. Machine B costs $4,760,000 and will last for 8 years. Variable costs for this machine are 32 percent of sales and fixed costs are $111,000 per year. The sales for each machine will be $9.52 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.)
If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B? (Do not round your intermediate calculations.)
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,100,000 and will last for 5 years. Variable costs are 34 percent of sales, and fixed costs are $129,000 per year. Machine B costs $4,760,000 and will last for 8 years. Variable costs for this machine are 32 percent of sales and fixed costs are $111,000 per year. The sales for each machine will be $9.52 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
EAC = [NPV of cash outflows/Annuity Factor]
Case A :
Fixed Cost - 129,000 $
Varibale Cost - 34% * 9,520,000$ = 3,236,800$
Useful LIfe = 5 yrs
Deprectiaiton / Salave value = O$
Tax Rate - 35%
Expected Return - 10%
Discount factor = 10%/(1-35%)=10%/65% = 15.38% say 15%
Cash out flow for M/c A = 3,365,800 $ per annum
NPV of cash outflow = 2,100,000 +(3365800*(Annity factor of 15% for 5 years)
NPV = 2,10,000 + 3,365,800*3.352
NPV = 2,10,000 + 11,180,696.72 $
NPV = 13,280,696.72 $
EAC = NPV / Annuity Factor A15% for 5 yrs
EAC = -3,962,021.69 $ (since cash outlfow)
Nearest Option = $-3,933,731.5
Case B:
Fixed Cost - 111,000 $
Varibale Cost - 32% * 9,520,000$ = 3,046,400$
Useful LIfe = 8 yrs
Deprectiaiton / Salave value = O$
Tax Rate - 35%
Expected Return - 10%
Discount factor = 10%/(1-35%)=10%/65% = 15.38% say 15%
Cash out flow for M/c B = 3,157,400 $ per annum
NPV of cash outflow = 4,760,000 +(3157400*(Annity factor of 15% for 8 years)
NPV = 4,760,000 + 3,365,800*4.4873
NPV = 4,760,000 + 13,990,896.48 $
NPV = 18,750,896.48 $
EAC = NPV / Annuity Factor A15% for 8 yrs
EAC = -4,231,614.51 $ (since cash outlfow)
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