Question

Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,300,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $440,000 per year. Machine B costs $5,572,000 and will last for nine years. Variable costs for this machine are 35 percent of sales and fixed costs are $285,000 per year. The sales for each machine will be $13.3 million per year. The required return is 10 percent, and the tax rate is 23 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 EAC for each machine. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) System A System B

Answer 1

Annual casshflow and EAC
			Machine A	Machine B
Sales			13300000	13300000
Less: Variable cost			5320000	4655000
Less: Fixed cost			440000	285000
Less: Depreciation			550000	619111.111
			(3300000/6)	(5572000/9)
Before tax Income			6990000	7740888.89
Less: tax @ 23%			1607700	1780404.44
after tax Income			5382300	5960484.44
Add: Depreciation			550000	619111.111
Annual cashflows			5932300	6579595.56
Annuity PVF at 10%			4.35526	5.75902
Present value of inflows			25836708.9	37892022.4
Less: Initial investment			3300000	5572000
NPV			22536708.9	32320022.4
Divide: Annuity PVF			4.35526	5.75902
EAC			5174595.52	5612069.83