Problem 6: ANALYZING A PROJECT REPLACEMENT DECISION FOR VANDELAY INDUSTRIES

Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,100,000 and will last for six years. Variable costs are 35% of sales, and fixed costs are $150,000 per year. Machine B costs $4,500,000 and will last for nine years. Variable costs for this machine are 30% of sales and fixed costs are $100,000 per year. The sales for each machine will be $9,000,000 per year. The appropriate discount rate is 10% and the tax rate is 35%. Both machines will be depreciated to zero 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? Explain your answer and show all your calculations.