Question

Vandelay industries is considering the purchase of a new machine for the production of latex machine a cost $2,900,000 and will last for six years variable costs are 35% of sales and fixed costs are $210,000 per year machine because $5,800,000 and will last for nine years variable cost for this machine or 30% of sales and fixed costs are $245,000 per year the sales for each machine will be $13 million per year the required return is 10% and the tax rate is 24% both machines will be depreciated on a straight line basis if the company plans to replace the machine when it wears out on a perpetual basis which machine should he choose?

Answer 1

	Machine A	Machine B
Variable cost	13,000,000 * 35% = -4,550,000	13,000,000 * 30% = - 3,900,000
Fixed cost	= - 210,000	= - 245,000
Depreciation	2,900,000 / 6 = - 483,333.33	5,800,000 / 9 = - 644,444.44
EBT	= -5,243,333.3	= -4,789,444.44
Tax	= 1,258,399.92	= 1,149,466.66
Net income	-3,984,933.38	= -3,639,977.78
+ Depreciation	= 483,333.33	= 644,444.44
OCF	= -3,501,600.05	= -2,995,533.34

NPV of Machine A :

NPVA = Machinary cost - Operating cash flow (PVIFA)

= - $2,900,000 - 3,501,600.05 (PVIFA10%,6)

= - $2,900,000 - 3,501,600.05 (4.3553)

= - $2,900,000 - 15,250,518.48

= $ -18,150,518.48

EACA = NPV / PVIFA

=  $- 18,150,518.48 / PVIFA(10% , 6)

    = - 18,150,518.48 / 4.3553

=$ - 4,167,455.39

NPV of Machine  B :

= $ - 5,800,000 - 2,995,533.34 ( PVIFA 10% ,9)

= - 5,800,000 -  2,995,533.34 (5.7590)

= $ - 23,051,276.50

EACB = NPV / PVIFA

= $ - 23,051,276.50 / 5.7590

= $ - 4,002,652.63

Company should choose Machine B. it has a less negative EAC.

Note :

EAC - Equivalent annual cost

Question have littile confusion about machine A and Machine B. i guessed that names used as my logic.

" Vandelay industries is considering the purchase of a new machine for the production of latex machine A cost $2,900,000 and will last for six years variable costs are 35% of sales and fixed costs are $210,000 per year machine B costs $5,800,000 and will last for nine years variable cost for this machine or 30% of sales and fixed costs are $245,000 per year the sales for each machine will be $13 million per year the required return is 10% and the tax rate is 24% both machines will be depreciated on a straight line basis if the company plans to replace the machine when it wears out on a perpetual basis which machine should he choose? "