Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,150,000 and will last for 6 years. Variable costs are 34 percent of sales, and fixed costs are $128,000 per year. Machine B costs $4,750,000 and will last for 10 years. Variable costs for this machine are 32 percent of sales and fixed costs are $124,000 per year. The sales for each machine will be $9.5 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.)
	(Click to select)$-11,110,005.25$3,624,060.8$-3,996,919.17$-4,417,647.5$-2,550,939.2

  

(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.)
	(Click to select)$-10,870,539.1$-16,365,382.43$3,511,609.37$-2,663,390.63$-12,014,806.37

Answer 1

Solution :

(a) The EAC of Machine A = $ - 2,550,939.20

= $ - 2,550,939.2 ( when rounded of to one decimal place ) ( Option 5 )

(b) The EAC of Machine B = $ - 2,663,390.63  ( Option 4 )

Please find the attached screenshots of the excel sheets containing the detailed calculation for the above solution.