Problem 6: ANALYZING A PROJECT REPLACEMENT DECISION FOR VANDELAY INDUSTRIES Vandelay Industries is considering the purchase of...

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Problem 6: ANALYZING A PROJECT REPLACEMENTDECISION FOR VANDELAY INDUSTRIES
Vandelay Industries is considering the purchase of a new machinefor the production of latex. Machine A costs $2,100,000 and willlast for six years. Variable costs are 35% of sales, and fixedcosts are $150,000 per year. Machine B costs $4,500,000 and willlast for nine years. Variable costs for this machine are 30% ofsales and fixed costs are $100,000 per year. The sales for eachmachine will be $9,000,000 per year. The appropriate discount rateis 10% and the tax rate is 35%. Both machines will be depreciatedto zero on a straight-line basis. If the company plans to replacethe machine when it wears out on a perpetual basis, which machineshould you choose? Explain your answer and show all yourcalculations.

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Problem 6: ANALYZING A PROJECT REPLACEMENTDECISION FOR VANDELAY INDUSTRIESVandelay Industries is considering the purchase of a new machinefor the production of latex. Machine A costs $2,100,000 and willlast for six years. Variable costs are 35% of sales, and fixedcosts are $150,000 per year. Machine B costs $4,500,000 and willlast for nine years. Variable costs for this machine are 30% ofsales and fixed costs are $100,000 per year. The sales for eachmachine will be $9,000,000 per year. The appropriate discount rateis 10% and the tax rate is 35%. Both machines will be depreciatedto zero on a straight-line basis. If the company plans to replacethe machine when it wears out on a perpetual basis, which machineshould you choose? Explain your answer and show all yourcalculations.