Vandelay Industries is considering the purchase of a new machine for the product
ID: 2759420 • Letter: V
Question
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,060,000 and will last for six years. Variable costs are 30 percent of sales, and fixed costs are $205,000 per year. Machine B costs 55,247,000 and will last for nine years. Variable costs for this machine are 25 percent of sales and fixed costs are $140,000 per year. The sales for each machine will be $10.3 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. Which machine should you choose? Machine A Machine BExplanation / Answer
Machine A
Machine B
Sales
$ 10,300,000.00
$ 10,300,000.00
Purchase Cost
$ 3,060,000.00
$ 5,247,000.00
Variable Cost
30 % of Sales
25 % of Sales
Fixed cost
$ 205,000.00
$ 140,000.00
Life
6 Years
9 Years
Dep. (SLM)
$ 510,000.00
$ 583,000.00
Required Return
9%
9%
Tax Rate
34%
34%
Calculation of EAC
Machine A
Machine B
Purchase
$ 3,060,000.00
$ 5,247,000.00
Variable Cost
$ 13,861,740.00
$ 15,437,760.75
Fixed Cost
$ 205,000.00
$ 140,000.00
PV of Dep.
$ 2,287,818.48
$ 3,495,228.94
PV of Total Cost
$ 19,414,558.48
$ 24,319,989.69
Life
6 Years
9 Years
Equated Annual Cost (EAC)
$ 3,235,759.75
$ 2,702,221.08
Decision : Choose Machine B, as the Equivalent cost per annum
is less as compare to Machine A
Machine A
Machine B
Sales
$ 10,300,000.00
$ 10,300,000.00
Purchase Cost
$ 3,060,000.00
$ 5,247,000.00
Variable Cost
30 % of Sales
25 % of Sales
Fixed cost
$ 205,000.00
$ 140,000.00
Life
6 Years
9 Years
Dep. (SLM)
$ 510,000.00
$ 583,000.00
Required Return
9%
9%
Tax Rate
34%
34%
Calculation of EAC
Machine A
Machine B
Purchase
$ 3,060,000.00
$ 5,247,000.00
Variable Cost
$ 13,861,740.00
$ 15,437,760.75
Fixed Cost
$ 205,000.00
$ 140,000.00
PV of Dep.
$ 2,287,818.48
$ 3,495,228.94
PV of Total Cost
$ 19,414,558.48
$ 24,319,989.69
Life
6 Years
9 Years
Equated Annual Cost (EAC)
$ 3,235,759.75
$ 2,702,221.08
Decision : Choose Machine B, as the Equivalent cost per annum
is less as compare to Machine A
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