Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,114,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $255,000 per year. Machine B costs $5,328,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $190,000 per year. The sales for each machine will be $11.3 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. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the NPV for each machine. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
  

	NPV
Machine A	$______________
Machine B	$ ______________

Calculate the EAC for each machine. (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
  

	EAC
Machine A	$____________
Machine B	$____________

Answer 1

1.NPV CALCULATION

	Machine A	Machine B
Sales	11300000	11300000
Less Variable cost	3955000	3955000
Fixed Cost	255000	190000
Less:Depreciation	519000	592000
Profit Before Tax	6571000	6563000
Less Taxation@35%	2299850	2297050
Profit After Tax	4271150	4265950
Add Back Depreciation	519000	592000
Cash Flow	4790150	4857950

Depreciation Machine A = 3114000/6 = 519000

Depreciation Machine B = 5328000 / 9 = 592000

NPV Machine A = - 3114000 + 4790150(PVAF 10%,6 Years)

                           = - 3114000 + (4790150 x 4.3553)

                           = - 3114000 + 20862540

NPV Machine A = $ 1,77,48,540

NPV Machine B = - 5328000 + 4857950(PVAF 10%,9 Years)

                          = - 5328000 + (4857950 x 5.7590)

                          = - 5328000 + 27976934

NPV Machine B = $ 2,26,48,934

NPV MACHINE A = $ 1,77,48,540

NPV MACHINE B = $ 2,26,48,934

2.EAC CALCULATION

EAC Machine A = $ 3114000 / 4.3553

                            = $ 7,14,991

EAC Machine B = $ 5328000 / 5.7590

                            = $ 9,25,161

EAC Machine A = $ 7,14,991

EAC Machine B = $ 9,25,161