Vandalay Industries is considering the purchase of a new machine for the product
ID: 2774450 • 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. (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))
Calculate the EAC for each machine. (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))
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
NPV for each Machines:
EAV for Each Machines
Machine-A Machine-B Cost a 31,02,000 53,10,000 Life 6 Years 9 Years Varible cost b 40 % of sales 35% of sales Fixed Cost c 2,45,000 1,80,000 Sales 11.1 million 11.1 million Sales d 1,11,00,000 1,11,00,000 Ke e 0.11 0.11 Tax rate f 0.30 0.30 Depreciation SLM SLM Amount g 5,17,000 5,90,000 Sales d 1,11,00,000 1,11,00,000 Variable Cost h=d*40% 44,40,000 38,85,000 Contribution i=d-h 66,60,000 72,15,000 Fixed Cost: Fixed cost j 2,45,000 1,80,000 Depreciation k 5,17,000 5,90,000 Net Profit Before tax l=i-j-k 58,98,000 64,45,000 Tax @ 30% f 17,69,400 19,33,500 Net Profit after Tax m=l-f 41,28,600 45,11,500 Depreciation k 5,17,000 5,90,000 Actual Cash Inflow n=m+k 46,45,600 51,01,500 Cumulative Present value factor @ 11% 4.231 5.538 Total Cash Inflow o 1,96,55,534 2,82,52,107 Initial Cash Flow a 31,02,000 53,10,000 NPV p=o-a 1,65,53,534 2,29,42,107Related Questions
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