Vandalay Industries is considering the purchase of a new machine for the product
ID: 2774522 • 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.
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
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))
Machine A
Machine Cost = 3,102,000
Annual Depreciation = Machine Cost /Useful Life
Annual Depreciation = 3102000/6
Annual Depreciation = $ 517000
Annual Cash Flow = (Sale*(1-Variable cost%)- Fixed Cost)*(1-tax rate) + Annual Depreciation*tax rate
Annual Cash Flow = (11100000*(1-40%)-245000)*(1-30%) + 517000*30%
Annual Cash Flow = $ 4,645,600
NPV = -Machine Cost + PV of Annual Cash Flow
NPV = - 3102000+ 4645600*(1-(1+11%)^-6)/11%
NPV = $ 16,551,386.65
Machine B
Machine Cost =5,310,000
Annual Depreciation = Machine Cost /Useful Life
Annual Depreciation = 5310000/9
Annual Depreciation = $ 590000
Annual Cash Flow = (Sale*(1-Variable cost%)- Fixed Cost)*(1-tax rate) + Annual Depreciation*tax rate
Annual Cash Flow = (11100000*(1-35%)-180000)*(1-30%) + 590000*30%
Annual Cash Flow = $ 5,101,500
NPV = -Machine Cost + PV of Annual Cash Flow
NPV = - 55310000+ 5101500*(1-(1+11%)^-9)/11%
NPV = $ 22,937,247.99
Calculate the EAC for each machine.
Machine A
Machine Cost = 3,102,000
Annual Depreciation = Machine Cost /Useful Life
Annual Depreciation = 3102000/6
Annual Depreciation = $ 517000
Annual Cash Out Flow = (Sale*Variable cost%+ Fixed Cost)*(1-tax rate) - Annual Depreciation*tax rate
Annual Cash Out Flow = (11100000*40%+245000)*(1-30%) - 517000*30%
Annual Cash Out Flow = $ 3,124,400
EAC = Annual Cash Out Flow + Machine Cost/PVA(rate,nper)
EAC = 3,124,400 + 3,102,000/((1-(1+11%)^-6)/11%)
EAC = $ 3,857,640.10
Machine B
Machine Cost = 5,310,000
Annual Depreciation = Machine Cost /Useful Life
Annual Depreciation = 5310000/9
Annual Depreciation = $ 590000
Annual Cash Out Flow = (Sale*Variable cost%+ Fixed Cost)*(1-tax rate) - Annual Depreciation*tax rate
Annual Cash Out Flow = (11100000*35%+180000)*(1-30%) - 590000*30%
Annual Cash Out Flow = $ 2,668,500
EAC = Annual Cash Out Flow + Machine Cost/PVA(rate,nper)
EAC = 2,668,500 + 5,310,000/((1-(1+11%)^-9)/11%)
EAC = $ 3,627,494.84
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