Vandalay Industries is considering the purchase of a new machine for the product

Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,210,000 and will last for 8 years. Variable costs are 37 percent of sales, and fixed costs are $170,000 per year. Machine B costs $4,680,000 and will last for 11 years. Variable costs for this machine are 28 percent of sales and fixed costs are $113,000 per year. The sales for each machine will be $9.36 million per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis. Required: (a) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A? (Do not round your intermediate calculations.) (Click to select) (b) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B? (Do not round your intermediate calculations.) (Click to select)

Explanation / Answer

NOTE: YOU MAY HAVE TO ENTER THE ANSWER WITH OR WITHOUT THE NEGATIVE SIGN

VANDALAY INDUSTRIES: a) MACHINE A: Annual worth of first cost = 2210000*0.10*1.1^8/(1.1^8-1) = $     -4,14,251.28 Annual after tax variable costs = 9360000*37%*65% = $   -22,51,080.00 Annual after tax fixed costs = 170000*65% = $     -1,10,500.00 Annual depreciation tax shield = (2210000/8)*35% = $           96,687.50 EAC $   -26,79,143.78 Answer b) MACHINE B: Annual worth of first cost = 4680000*0.10*1.1^11/(1.1^11-1) = $     -7,20,547.50 Annual after tax variable costs = 9360000*28%*65% = $   -17,03,520.00 Annual after tax fixed costs = 1130000*65% = $         -73,450.00 Annual depreciation tax shield = (4680000/11)*35% = $       1,48,909.09 EAC $   -23,48,608.41 Answer

Related Questions

Navigate

• Browse (All)
• Browse V
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.