Question

Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,320,000 and will last for six years. Variable costs are 38 percent of sales and fixed costs are $460,000 per year. Machine B costs $5,598,000 and will last for nine years. Variable costs for this machine are 33 percent of sales and fixed costs are $295,000 per year. The sales for each machine will be $13.5 million per year. The required return is 8 percent and the tax rate is 25 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 EAC for each machine. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

System A:

System B:

Answer 1