Vandalay Industries is considering the purchase of a new machine for the product
ID: 2640014 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,132,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $270,000 per year. Machine B costs $5,355,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $205,000 per year. The sales for each machine will be $11.6 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.
Calculate the EAC for each machine.
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,132,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $270,000 per year. Machine B costs $5,355,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $205,000 per year. The sales for each machine will be $11.6 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.
Explanation / Answer
Statemnet showing Cash flows Machine A Machine B Particulars Time PV Amount PV Amount PV Cash Outflows - 1.00 (3,132,000.00) (3,132,000.00) (5,355,000.00) (5,355,000.00) PV of Cash outflows (3,132,000.00) (5,355,000.00) Cash Inflowd aftertax 1.00 0.9091 4,908,200.00 4,462,000.00 5,353,000.00 4,866,363.64 Cash Inflowd aftertax 2.00 0.8264 4,908,200.00 4,056,363.64 5,353,000.00 4,423,966.94 Cash Inflowd aftertax 3.00 0.7513 4,908,200.00 3,687,603.31 5,353,000.00 4,021,788.13 Cash Inflowd aftertax 4.00 0.6830 4,908,200.00 3,352,366.64 5,353,000.00 3,656,171.03 Cash Inflowd aftertax 5.00 0.6209 4,908,200.00 3,047,606.04 5,353,000.00 3,323,791.84 Cash Inflowd aftertax 6.00 0.5645 4,908,200.00 2,770,550.94 5,353,000.00 3,021,628.95 Cash Inflowd aftertax 7.00 0.5132 5,353,000.00 2,746,935.41 Cash Inflowd aftertax 8.00 0.4665 5,353,000.00 2,497,214.01 Cash Inflowd aftertax 9.00 0.4241 5,353,000.00 2,270,194.55 PV of Cash Inflows 21,376,490.57 30,828,054.49 NPV 18,244,490.57 25,473,054.49 PVF 4.36 5.76 EAC 4,189,031.88 4,423,173.21 Particulars Machine A Machine B Sales 11,600,000.00 11,600,000.00 VC @35% and 30% respectively 4,060,000.00 3,480,000.00 Fixed Costs 270,000.00 205,000.00 Net profit 7,270,000.00 7,915,000.00 Depreciation(3132000/6) & 5355000/9 522,000.00 595,000.00 Profit after depr 6,748,000.00 7,320,000.00 Tax @35% 2,361,800.00 2,562,000.00 Net Profit after Tax 4,386,200.00 4,758,000.00 Depreciation 522,000.00 595,000.00 Cash flows after tax 4,908,200.00 5,353,000.00
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