Question: Vandalay Industries is considering the purchase of a new machine
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,900,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $2,100,000 per year. Machine B costs $5,400,000 and will last for nine years. Variable costs for this machine are 30 percent and fixed costs are $2,400,000 per year. The sales for each machine will be $12 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. If the company plans to replace the machine when it wears out on a perpetual basis, which machine should you choose?
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