Question

1) Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,072,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $215,000 per year. Machine B costs $5,265,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $150,000 per year. The sales for each machine will be $10.5 million per year. The required return is 10 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. (Your answers should be negative values and indicated by minus signs. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Machine A:

Machine B:

2) Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,140,000 in annual sales, with costs of $835,000. The tax rate is 21 percent and the required return is 10 percent. What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NVP:

Answer 1

1)