Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine...

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Vandalay Industries is considering the purchase of a new machinefor the production of latex. Machine A costs $3,102,000 and willlast for six years. Variable costs are 40 percent of sales, andfixed costs are $245,000 per year. Machine B costs $5,310,000 andwill last for nine years. Variable costs for this machine are 35percent of sales and fixed costs are $180,000 per year. The salesfor each machine will be $11.1 million per year. The requiredreturn is 11 percent, and the tax rate is 30 percent. Both machineswill be depreciated on a straight-line basis. The company plans toreplace the machine when it wears out on a perpetual basis.
Calculate the EAC for each machine. (Negative amountsshould be indicated by a minus sign. Do not roundintermediate calculations and round your answers to 2 decimalplaces. (e.g., 32.16))
EAC
Machine A $
Machine B $

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3.5 Ratings (551 Votes)

Calculation of EAC ie Equivalent annual cost EAC Annual Operating cost Initial Investment PV Annuity Factor 11 Step 1 Calculation of annuity factor PV Annuity factor 1 1rnr where r discount rate and n number of years PV Annuity Factor for Machine A 1 10116011 See Answer

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Transcribed Image Text

Vandalay Industries is considering the purchase of a new machinefor the production of latex. Machine A costs $3,102,000 and willlast for six years. Variable costs are 40 percent of sales, andfixed costs are $245,000 per year. Machine B costs $5,310,000 andwill last for nine years. Variable costs for this machine are 35percent of sales and fixed costs are $180,000 per year. The salesfor each machine will be $11.1 million per year. The requiredreturn is 11 percent, and the tax rate is 30 percent. Both machineswill be depreciated on a straight-line basis. The company plans toreplace the machine when it wears out on a perpetual basis.Calculate the EAC for each machine. (Negative amountsshould be indicated by a minus sign. Do not roundintermediate calculations and round your answers to 2 decimalplaces. (e.g., 32.16))EAC Machine A$ Machine B$