Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,140,000 and will last for 6 years. Variable costs are 37 percent of sales, and fixed costs are $165,000 per year. Machine B costs $4,390,000 and will last for 10 years. Variable costs for this machine are 30 percent of sales and fixed costs are $114,000 per year. The sales for each machine will be $8.78 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.)

(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.)

Answer 1