Vandalay Industries is considering the purchase of a new machine for the product
ID: 2633155 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,860,000 and will last for 7 years. Variable costs are 35 percent of sales, and fixed costs are $158,000 per year. Machine B costs $4,420,000 and will last for 9 years. Variable costs for this machine are 32 percent of sales and fixed costs are $129,000 per year. The sales for each machine will be $8.84 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:
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.)
-2402854.23
3343145.77
11698100.75
4074840
3686760
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.)
7433645.85
-14502214.21
-6725679.57
-2518172.29
3227827.71
(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.)
-2402854.23
3343145.77
11698100.75
4074840
3686760
(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.)
7433645.85
-14502214.21
-6725679.57
-2518172.29
3227827.71
Explanation / Answer
(a)
operating cash flow = 1,860,000/7*35% + 8,840,000*(1-35%) - 8,840,000*35%*(1-35%) - 158,000*(1-35%) = 3,725,200
NPV = -1,860,000 + 3,725,200*PVIFA10%,7
EAC = NPV / PVIFA10%,7 = (-1,860,000 + 3,725,200*PVIFA10%,7)/PVIFA10%,7 = 3,343,145.77
(b)
operating cash flow = 4,420,000/9*35% + 8,840,000*(1-35%) - 8,840,000*32%*(1-35%) - 129,000*(1-35%) = 3,995,318.89
NPV = -4,420,000 + 3,995,318.89*PVIFA10%,9
EAC = NPV / PVIFA10%,10 = (-4,420,000 + 3,995,318.89*PVIFA10%,9)/PVIFA10%,9 = 3,227827.71
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