Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A
Question:
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,150,000 and will last for six years. Variable costs are 37 percent of sales, and fixed costs are $290,000 per year. Machine B costs $5,377,000 and will last for nine years. Variable costs for this machine are 32 percent of sales and fixed costs are $210,000 per year. The sales for each machine will be $11.8 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.
System A?
System B?
Which machine should the company use?
A or B?
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th Edition
Authors: Stephen A. Ross, Randolph W. Westerfield, Bradford D.Jordan