Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,810,000 and will last for 6 years. Variable costs are 39 percent of sales, and fixed costs are $125,000 per year. Machine B costs $4,410,000 and will last for 9 years. Variable costs for this machine are 27 percent of sales and fixed costs are $77,000 per year. The sales for each machine will be $8.82 million per year. The required return is 10 percent and the tax rate is 21 percent. Both machines will be depreciated on a straight-line basis. If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A? If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B?

Answer 1

x fix r C =8820000*39%+125000 D E on B4 : A B 1 Machine A: Operating 2 Year costs 3 0 4 11 $3,564,800 5 2 $3,564,800 6 3 $3,564,800 7 4 $3,564,800 8 5 $3,564,800 9 6 $3,564,800 10 Depreciati Tax @21% Cash outflows (Tax saved- | Total saved on costs Operating costs) 1,810,000 $ 301,667 $ 3,866,467 | $ 811,958 $ 2,752,842 $ 301,667 $3,866,467 $ 811,958 $ 2,752,842 $ 301,667 $3,866,467 $ 811,958 $ 2,752,842 $ 301,667 $ 3,866,467 $ 811,958 $ 2,752,842 $ 301,667 $3,866,467 $ 811,958 $ 2,752,842 $ 301,667 $3,866,467 $ 811,958 $ 2,752,842 PVIF@10% 1.000 $ 0.909 $ 0.826 $ 0.751 $ 0.683 $ 0.621 $ 0.564 $ Present value 1,810,000 2,502,584 2,275,076 2,068,251 1,880,228 1,709,298 1,553,908 12 Total present value of costs 13,799,345 :PVIFA(10%,6) 4.355 Equivalent annual cost (EAC) $-3,168,431.36 15 Machine B: Operating Depreciati Tax @21% Cash outflows (Operating 16 Year costs on Total saved on costs costs-Tax saved) 17 0 $ 4,410,000 18 1$2,458,400 $ 490,000 $ 2,948,400 $ 619,164 | $ 1,839,236 2 $2,458,400 $ 490,000 $2,948,400$ 619,164 $ 1,839,236 3 $2,458,400 $ 490,000 $ 2,948,400 $ 619,164 $ 1,839,236 4 $2,458,400 $ 490,000 $2,948,400 $ 619,164 $ 1,839,236 22 5 $ 2,458,400 $ 490,000 $2,948,400 $ 619,164 $ 1,839,236 6 $2,458,400 $ 490,000 $2,948,400 $ 619,164 $ 1,839,236 7 $2,458,400 $ 490,000 $2,948,400$ 619,164 $ 1,839,236 8 $ 2,458,400 $ 490,000 $2,948,400 $ 619,164 $ 1,839,236 9 $ 2,458,400 $ 490,000 $ 2,948,400 $ 619,164 $ 1,839,236 PVIF@10% 1.000 $ 0.909 $ 0.826 $ 0.751 $ 0.683 $ 0.621 $ 0.564 $ 0.513 $ 0.467 $ 0.424 $ Present value 4,410,000 1,672,033 1,520,030 1,381,845 1,256,223 1,142,021 1,038,201 943,819 858,017 780,016 27 28 Total present value of costs 15,002,204 :PVIFA(10%,9) 5.759 Equivalent annual cost (EAC) $ -2,604,990.78 30 Select "Machine B"

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