Vandalay Industries is considering the purchase of a new machine for the product
ID: 2797091 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,880,000 and will last for 8 years. Variable costs are 33 percent of sales, and fixed costs are $133,000 per year. Machine B costs $4,460,000 and will last for 12 years. Variable costs for this machine are 28 percent of sales and fixed costs are $100,000 per year. The sales for each machine will be $8.92 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.
Required:
(a) 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.)
a) $-3,987,417
b) $3,607,663
c) $-3,607,663
d) $-2,269,934.75
e) $-12,109,934.38
(b) 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.)
a) $-2,212,921.05
b) $-8,200,206.13
c) $-15,078,162.08
d) $-7,419,234.12
e) $3,585,078.95
Explanation / Answer
EAC for machine A
EAC for machine B
cost of machine
-1880000
cost of machine
-4460000
sales
8920000
8920000
sales
8920000
Variable cost
33% of sales
-2943600
2943600
Variable cost
28% of sales
-2497600
Fixed cost
-133000
Fixed cost
-100000
Depreciation
-235000
Depreciation
-371667
EBT
-3311600
EBT
-2969267
less tax 35%
-1159060
less tax 35%
-1039243
EAT
-2152540
EAT
-1930023
add depreciation
235000
add depreciation
371667
Operating cash flow
-1917540
Operating cash flow
-1558356
EAC for A
cost of machine/PVAF + operating cash flow
(-1880000/5.3349)-1917540
-2269936
EAC for B
cost of machine/PVAF + operating cash flow
(-4460000/6.8136)-1544316
-2212920
Answer is D
Answer is A
PVAF at 10% for 6 Years
1-(1+r)^-n / r
1-(1.1)^-6 /.1
5.3349
PVAF at 10% for 6 Years
1-(1+r)^-n / r
1-(1.1)^-10 /.1
6.8136
EAC for machine A
EAC for machine B
cost of machine
-1880000
cost of machine
-4460000
sales
8920000
8920000
sales
8920000
Variable cost
33% of sales
-2943600
2943600
Variable cost
28% of sales
-2497600
Fixed cost
-133000
Fixed cost
-100000
Depreciation
-235000
Depreciation
-371667
EBT
-3311600
EBT
-2969267
less tax 35%
-1159060
less tax 35%
-1039243
EAT
-2152540
EAT
-1930023
add depreciation
235000
add depreciation
371667
Operating cash flow
-1917540
Operating cash flow
-1558356
EAC for A
cost of machine/PVAF + operating cash flow
(-1880000/5.3349)-1917540
-2269936
EAC for B
cost of machine/PVAF + operating cash flow
(-4460000/6.8136)-1544316
-2212920
Answer is D
Answer is A
PVAF at 10% for 6 Years
1-(1+r)^-n / r
1-(1.1)^-6 /.1
5.3349
PVAF at 10% for 6 Years
1-(1+r)^-n / r
1-(1.1)^-10 /.1
6.8136
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