Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1.98 million and will last for six years. Variable costs are 35 percent of sales and fixed costs are $187,000 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 $145,000 per year. The sales for each machine will be $12.4 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, which machine should you choose?