Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,820,000 and will last for 5 years. Variable costs are 33 percent of sales, and fixed costs are $120,000 per year. Machine B costs $4,570,000 and will last for 8 years. Variable costs for this machine are 29 percent of sales and fixed costs are $108,000 per year. The sales for each machine will be $9.14 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.

1) 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.) a) $3,549,758.58 b) $-3,917,686.5 c) $-2,391,241.42 d) $-3,544,573.5 e) $-9,064,686.32 2) 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.) a) $-8,993,882.85 b) $-13,069,351.01 c) $-2,499,771.66 d) $-9,940,607.36 e) $3,491,228.34

Answer 1

Calculate the equivalent annual cost as follows:

Formulas: