Vandalay Industries is considering the purchase of a new machine for the production of latex....
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Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,960,000 and will last for 7 years. Variable costs are 37 percent of sales, and fixed costs are $147,000 per year. Machine B costs $4,550,000 and will last for 10 years. Variable costs for this machine are 30 percent of sales and fixed costs are $97,000 per year. The sales for each machine will be $9.1 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.
| Required: |
| (a) | If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A? |
| (b) | If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B? |
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