Vandalay Industries is considering the purchase of a new machine for the product
ID: 1091900 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,150,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $285,000 per year. Machine B costs $5,382,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $220,000 per year. The sales for each machine will be $11.9 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. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places (e.g., 32.16).)
Calculate the EAC for each machine. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places (e.g., 32.16).)
Calculate the NPV for each machine. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Machine A Year 0 1 2 3 4 5 6 Cost $ (3,150,000.00) Sales $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 VC $ 4,165,000.00 $ 4,165,000.00 $ 4,165,000.00 $ 4,165,000.00 $ 4,165,000.00 $ 4,165,000.00 FC $ 285,000.00 $ 285,000.00 $ 285,000.00 $ 285,000.00 $ 285,000.00 $ 285,000.00 Depreciation $ 525,000.00 $ 525,000.00 $ 525,000.00 $ 525,000.00 $ 525,000.00 $ 525,000.00 EBIT $ 6,925,000.00 $ 6,925,000.00 $ 6,925,000.00 $ 6,925,000.00 $ 6,925,000.00 $ 6,925,000.00 Tax $ 2,423,750.00 $ 2,423,750.00 $ 2,423,750.00 $ 2,423,750.00 $ 2,423,750.00 $ 2,423,750.00 PAT $ 4,501,250.00 $ 4,501,250.00 $ 4,501,250.00 $ 4,501,250.00 $ 4,501,250.00 $ 4,501,250.00 Depreciation $ 525,000.00 $ 525,000.00 $ 525,000.00 $ 525,000.00 $ 525,000.00 $ 525,000.00 Net cash flow $ (3,150,000.00) $ 5,026,250.00 $ 5,026,250.00 $ 5,026,250.00 $ 5,026,250.00 $ 5,026,250.00 $ 5,026,250.00 NPV $ 18,740,629.09 Machine B Year 0 1 2 3 4 5 6 7 8 9 Cost $ (538,000.00) Sales $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 $ 11,900,000.00 VC $ 3,570,000.00 $ 3,570,000.00 $ 3,570,000.00 $ 3,570,000.00 $ 3,570,000.00 $ 3,570,000.00 $ 3,570,000.00 $ 3,570,000.00 $ 3,570,000.00 FC $ 220,000.00 $ 220,000.00 $ 220,000.00 $ 220,000.00 $ 220,000.00 $ 220,000.00 $ 220,000.00 $ 220,000.00 $ 220,000.00 Depreciation $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 EBIT $ 7,512,222.22 $ 7,512,222.22 $ 7,512,222.22 $ 7,512,222.22 $ 7,512,222.22 $ 7,512,222.22 $ 7,512,222.22 $ 7,512,222.22 $ 7,512,222.22 Tax $ 2,629,277.78 $ 2,629,277.78 $ 2,629,277.78 $ 2,629,277.78 $ 2,629,277.78 $ 2,629,277.78 $ 2,629,277.78 $ 2,629,277.78 $ 2,629,277.78 PAT $ 4,882,944.44 $ 4,882,944.44 $ 4,882,944.44 $ 4,882,944.44 $ 4,882,944.44 $ 4,882,944.44 $ 4,882,944.44 $ 4,882,944.44 $ 4,882,944.44 Depreciation $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 $ 597,777.78 Net cash flow $ (538,000.00) $ 5,480,722.22 $ 5,480,722.22 $ 5,480,722.22 $ 5,480,722.22 $ 5,480,722.22 $ 5,480,722.22 $ 5,480,722.22 $ 5,480,722.22 $ 5,480,722.22 NPV $ 31,025,609.81
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