Vandalay Industries is considering the purchase of a new machine for the product
ID: 2814828 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,084,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $225,000 per year. Machine B costs $5,283,000 and will last for nine years. Variable costs for this machine are 35 percent and fixed costs are $160,000 per year. The sales for each machine will be $10.7 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.
Machine A:
Machine B:
Calculate the EAC for each machine.
Machine A:
Maching B:
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,084,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $225,000 per year. Machine B costs $5,283,000 and will last for nine years. Variable costs for this machine are 35 percent and fixed costs are $160,000 per year. The sales for each machine will be $10.7 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
Sorry Dear this question is too long as you mix two questions in a single one and there is a policy of chegg to answer only one question .
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Solution :- Cost Life (Years) Dep per year Machine A 3084000 6 514000 Machine B 5283000 9 587000 NPV for machine A Year 0 1 2 3 4 5 6 Machine cost -3084000 Sales 10700000 10700000 10700000 10700000 10700000 10700000 Less :- Fixed Cost 225000 225000 225000 225000 225000 225000 Less :- Variable Cost 4280000 4280000 4280000 4280000 4280000 4280000 EBIT 6195000 6195000 6195000 6195000 6195000 6195000 Less :- Dep 514000 514000 514000 514000 514000 514000 EBIT after Dep 5681000 5681000 5681000 5681000 5681000 5681000 Less :- Tax (30%) 1704300 1704300 1704300 1704300 1704300 1704300 EAT 3976700 3976700 3976700 3976700 3976700 3976700 Add :- Dep as non cash 514000 514000 514000 514000 514000 514000 EAT before dep 4490700 4490700 4490700 4490700 4490700 4490700 PVF@11% 1 0.900901 0.8116224 0.731191 0.658731 0.593451 0.534641 PV -3084000 4045676 3644752.9 3283561 2958163 2665012 2400912 Therefore NPV of Machine A 15914076 NPV for machine B Year 0 1 2 3 4 5 6 7 8 9 Machine cost -3084000 Sales 10700000 10700000 10700000 10700000 10700000 10700000 10700000 10700000 10700000 Less :- Fixed Cost 160000 160000 160000 160000 160000 160000 160000 160000 160000 Less :- Variable Cost 3745000 3745000 3745000 3745000 3745000 3745000 3745000 3745000 3745000 EBIT 6795000 6795000 6795000 6795000 6795000 6795000 6795000 6795000 6795000 Less :- Dep 587000 587000 587000 587000 587000 587000 587000 587000 587000 EBIT after Dep 6208000 6208000 6208000 6208000 6208000 6208000 6208000 6208000 6208000 Less :- Tax (30%) 1862400 1862400 1862400 1862400 1862400 1862400 1862400 1862400 1862400 EAT 4345600 4345600 4345600 4345600 4345600 4345600 4345600 4345600 4345600 Add :- Dep as non cash 587000 587000 587000 587000 587000 587000 587000 587000 587000 EAT before dep 4932600 4932600 4932600 4932600 4932600 4932600 4932600 4932600 4932600 PVF@11% 1 0.900901 0.8116224 0.731191 0.658731 0.593451 0.534641 0.481658 0.433926 0.390925 PV -3084000 4443784 4003408.8 3606675 3249256 2927258 2637169 2375828 2140386 1928276 Therefore NPV of Machine B 24228041Related Questions
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