Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,970,000 and will last for 5 years. Variable costs are 36 percent of sales, and fixed costs are $146,000 per year. Machine B costs $4,430,000 and will last for 8 years. Variable costs for this machine are 31 percent of sales and fixed costs are $80,000 per year. The sales for each machine will be $8.86 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.

(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

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