Question

Alexander Industries is considering the purchase of a new machine for the production of latex. Machine A costs $4,900,000 and will last for five years. Variable costs are 35% of sales and fixed costs are $170,000 per year. Machine B costs $8,100,000 and will last for eleven years. Variable costs for this machine are 30% of sales and fixed costs are $130,000 per year. The sales for each machine will be $10 million per year. The required return is 10% and the tax rate is 35%. Both machines will be depreciated straight-line over their lifetimes.

1) What are the equivalent annual costs of each machine?

2) Which machine should Alexander Industries select?

Please show all the steps carefully with explanation. Thank You.

Answer 1

Gree highlight is solution for 1 an yellow highlight for 2