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(a) Heer Enterprize is considering the purchase of a new machine for the production of latex. Machine A costs $2,600,000 and will last for
(a) Heer Enterprize is considering the purchase of a new machine for the production of latex. Machine A costs $2,600,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $160,000 per year. Machine B costs $4,900,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $110,000 per year. The sales for each machine will be $9 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. If the Company plans to replace the machine when it wears out on a perpetual basis, which machine should you choose?
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