7. 27.

Comparing mutually exclusive projects [LO 10.4] Ingebyra Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2 900 000 and will last for six years. Variable costs are 35 per cent of sales and fixed costs are $210 000 per year. Machine B costs $5 800 000 and will last for nine years.

Variable costs for this machine are 30 per cent of sales and fixed costs are $245 000 per year. The sales for each machine will be $13 million per year. The required return is 10 per cent and the tax rate is 30 per cent. Both machines will be depreciated on a straight-line basis over their life. If the company plans to replace the machine when it wears out on a perpetual basis, which machine should it choose?