Vandalay Industries is considering the purchase of a new machine for the product
ID: 2774414 • Letter: V
Question
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,102,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $245,000 per year. Machine B costs $5,310,000 and will last for nine years. Variable costs for this machine are 35 percent and fixed costs are $180,000 per year. The sales for each machine will be $11.1 million per year. The required return is 11 percent and the tax rate is 30 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 $3,102,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $245,000 per year. Machine B costs $5,310,000 and will last for nine years. Variable costs for this machine are 35 percent and fixed costs are $180,000 per year. The sales for each machine will be $11.1 million per year. The required return is 11 percent and the tax rate is 30 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
Calculation of NPV:
Present Value of Cash Inflow of Machine A for 6 Years at 11% = 4.23054
Present Value of Inflow = 4,645,600 x 4.23054 = $19,653,397
NPV = PV of Inflow - Outflow
NPV of Machine A = 19,653,397 - 3,102,000 = $16,551,397
Present Value of Cash Inflow of Machine B for 9 Years at 11% = 5.53705
Present Value of Inflow = 5,101,500 x 5.53705 = $28,247,261
NPV = PV of Inflow - Outflow
NPV of Machine A = 28,247,261 - 5,310,000 = $22,937,261
Machine A Machine B Sales 11,100,000 11,100,000 Less: VC 4,440,000 3,885,000 Less: Fixed Cost 245,000 180,000 Less: Depreciation 517,000 590,000 Earning Before Tax 5,898,000 6,445,000 Less: Tax 1,769,400 1,933,500 Net Income 4,128,600 4,511,500 Add: Depreciation 517,000 590,000 Cash Inflow 4,645,600 5,101,500Related Questions
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