Vandelay Industries is considering the purchase of a new machine for the product
ID: 2751608 • Letter: V
Question
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A coats S3.078.000 and will last for soc years. Variable costs a-e 30 percent of sales, and fixed costs a-e $220.000 per year. Machine B costs S5.274.000 and will last for rune years. Variable costs for this machine are 25 percent of sales and fixed costs are Si55.000 per year. The sales for each machine w be $10.6 million per year. The required return is 9 percent, and the tax rate is 34 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 EAC for each machine. (Enter your answer In dollars, not millions of dollars, e.g. 1.234,567. 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.) Which machine should you choose?Explanation / Answer
SOLUTION :
A
B
COST
3078000
5274000
LIFE
6
9
DEPRECIATION
513000
586000
VC (SALES X 30%), (SALES X25%)
3180000
2650000
FC
220000
155000
TAX
34%
34%
DISCOUNT RATE
9%
9%
SALES
10600000.00
10600000.00
VC +FC + DEPRECIATION
3913000.00
3391000.00
LESS : TAX SHIELD ON ABOVE @ 34%
-1330420
-1152940
NET
5243420.00
4543940.00
LESS : DEPRECIATION (NON CASH EXP)
-513000
-586000
NET CASH EXP
4730420.00
3957940.00
DISCOUNT FACTOR
4.48592
5.99525
PRESENT VALUE OF CASH OUTFLOW
21220279.02
23728827.49
PRESENT VALUE OF INITIAL CASH OUTFLOW
3078000
5274000
NPV
24298279.02
29002827.49
EAC
5,416,567.09
4,837,636.88
(24298279/4.48592)
(29002827/5.99525)
Machine B should be selected based on EAC (i.e it has low EAC as compared to A)
A
B
COST
3078000
5274000
LIFE
6
9
DEPRECIATION
513000
586000
VC (SALES X 30%), (SALES X25%)
3180000
2650000
FC
220000
155000
TAX
34%
34%
DISCOUNT RATE
9%
9%
SALES
10600000.00
10600000.00
VC +FC + DEPRECIATION
3913000.00
3391000.00
LESS : TAX SHIELD ON ABOVE @ 34%
-1330420
-1152940
NET
5243420.00
4543940.00
LESS : DEPRECIATION (NON CASH EXP)
-513000
-586000
NET CASH EXP
4730420.00
3957940.00
DISCOUNT FACTOR
4.48592
5.99525
PRESENT VALUE OF CASH OUTFLOW
21220279.02
23728827.49
PRESENT VALUE OF INITIAL CASH OUTFLOW
3078000
5274000
NPV
24298279.02
29002827.49
EAC
5,416,567.09
4,837,636.88
(24298279/4.48592)
(29002827/5.99525)
Machine B should be selected based on EAC (i.e it has low EAC as compared to A)
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