Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,150,000 and will last for 4 years. Variable costs are 36 percent of sales, and fixed costs are $169,000 per year. Machine B costs $4,530,000 and will last for 7 years. Variable costs for this machine are 27 percent of sales and fixed costs are $110,000 per year. The sales for each machine will be $9.06 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.
a) |
If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A? |
(b) |
If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B? |
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