Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,960,000 and will last for 6 years. Variable costs are 33 percent of sales, and fixed costs are $136,000 per year. Machine B costs $4,220,000 and will last for 10 years. Variable costs for this machine are 30 percent of sales and fixed costs are $82,000 per year. The sales for each machine will be $8.44 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.)
	$-3,557,224.33 $-3,931,669 $-9,731,730.44 $-2,234,477.13 $3,251,522.87

   

(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.)
	$-2,238,185.57 $3,247,814.43 $-9,227,008.23 $-10,198,272.25 $-13,752,681.41

Answer 1