Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,300,000 and will last for 4 years. Variable costs are 33 percent of sales, and fixed costs are $120,000 per year. Machine B costs $4,460,000 and will last for 7 years. Variable costs for this machine are 32 percent of sales and fixed costs are $130,000 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.)

   

(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.)

Answer 1

Solution :

(a) The EAC for machine A = - $ 2,515,672.8485

= - $ 2,515,672.85 ( when rounded off to two decimal places )

(b) The EAC for machine B = - $ 2,632,968.5287

= - $ 2,632,968.53 ( when rounded off to two decimal places )

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.