Vandalay Industries is considering the purchase of a new machine for the product
ID: 2814502 • Letter: V
Question
Vandalay 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 NPV for each machine. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Calculate the EAC for each machine. (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Which machine should the company choose?
Machine A
Machine B
THESE ARE NOT THE ANSWERS:
NPV MachineA (14,965,207.13) MachineB (20,677,737.99)
EAC MachineA (-3,537,424.23) MachineB (-3,734,433.90)
NPV Machine A $ Machine B $Explanation / Answer
I. Calculation of NPV for each machine.
- Machine A
Net Present Value = PV of Inflows - PV of Outflows
= 18,015,174.90 - 3,048,000
= 14,967,174.90
Cashflow per Year = Sles - Variable cost - fixed costs = (10100000*.6)-195000 = 5,865,000
Depreciation per Year = Cost/Useful life = 3,048,000/6 = 508,000
PBT = Cashflow - Depreciation
PVAF = (1-(1+r)^-n)/r = (1-1.11^-6) / .11= 4.231
- Machine B
Net Present Value = PV of Inflows - PV of Outflows
= 25,906,515.60-5,229,000
= 20,677,515.60
Cashflow per Year = Sles - Variable cost - fixed costs = (10100000*.65)-130000 = 6,435,000
Depreciation per Year = Cost/Useful life = 5229000/9 = 581,000
PBT = Cashflow - Depreciation
PVAF = (1-(1+r)^-n)/r = (1-1.11^-9) / .11= 5.537
II. Calculation of EAC for each machine.
III. Which machine should the company choose?
Based on NPV machine B is preferable, since it has higher NPV
BAsed on EAC also machine B is preferable, since it has lower EAC
Year Cashflow Depreciation (De) PBT Tax@30% PAT (PBT-Tax) CFAT(PAT+De) PVF/PVAF@11% CFAT*PVF 0 (3,048,000) - - - - (3,048,000) 1 (3,048,000.00) 1-6 5,865,000 508,000 5,357,000 1,607,100 3,749,900 4,257,900 4.2310 18,015,174.90Related Questions
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