Vandalay Industries is considering the purchase of a new machine for the product
ID: 2614982 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,030,000 and will last for 4 years. Variable costs are 38 percent of sales, and fixed costs are $162,000 per year. Machine B costs $4,770,000 and will last for 7 years. Variable costs for this machine are 28 percent of sales and fixed costs are $90,000 per year. The sales for each machine will be $9.54 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.
If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A?
If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B?
(a)If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A?
(b)If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B?
Explanation / Answer
For Calculation EAC , it includes only operating costs.Sales are not considered while calculating EAC.
(9540000*0.38)
=(3625200)
(9540000*0.28)
=(2671200)
(2284055)*PVIFA(10%,4) - 2030000
=(9270226)
(1556280) * PVIFA(10%,7) - 4,770,000
= (12346594)
(9270226) / PVIFA(10%,4)
= (2924454)
(12346594) / PVIFA(10%,7)
= (2536068)
a.) EAC for machine A = ($2924454)
b) EAC for machine B = ($2536068)
Machine A Machine B Variable cost(9540000*0.38)
=(3625200)
(9540000*0.28)
=(2671200)
fixed cost (162,000) (90,000 ) Depreciation (507500) (681429) Earning before tax (4294700) (3442629) tax 1503145 1204920 Net income (2791555) (2237709) Add: Deprecation 507500 681429 Operating cash flow (2284055) (1556280) NPV (present value of cash inflow-present value of cash outflow)(2284055)*PVIFA(10%,4) - 2030000
=(9270226)
(1556280) * PVIFA(10%,7) - 4,770,000
= (12346594)
EAC [NPV / PVIFA](9270226) / PVIFA(10%,4)
= (2924454)
(12346594) / PVIFA(10%,7)
= (2536068)
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