Vandalay Industries is considering the purchase of a new machine for the production of latex Machine A costs $2,350,000 and will last for 5 years Variable costs are 39 percent of sales, and fixed costs are $122,000 per year Machine B costs $4,570,000 and will last for 7 years Variable costs for this machine are 31 percent of sales and fixed costs are $85,000 per year The sales for each machine will be $9 14 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 (Do not round your intermediate calculations ) (Click to select)$3,089,285 92$ 4,352,700 5$ 4,810,879 5$ 2,851,714 08$ 10,810,240 (b) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B (Do not round your intermediate calculations ) (Click to select)$ 7,444,468 73$ 2,607,163 13$3,333,836 87$ 8,228,097 01$ 12,692,762 06 THE SCREENSHOT BELOW SHOWS HOW THE CALCULATION NEEDS TO BE DONE PLEASE FOLLOW THE STEPS AS SHOWN BELOW Since we need to calculate the EAC for each machine, sales are irrelevant EAC only uses the costs of operating the equipment, not the sales Using the bottom up approach, or net income plus depreciation, method to calculate OCF, we get Variable costs Fixed costs Depreciation EBT Tax Net income Depreciation OCF Machine A $ 3,031,200 164,000 265,000 $ 3,460,200 1,211,070 $ 2,249,130 265,000 $ 1,984,130 Machine B $ 2,526,000 83,000 382,727 $ 2,991,727 1,047,105 $ 1,944,622 382,727 $ 1,561,895 The NPV and EAC for Machine A is NPVA $ 2,120,000 1,984,130(PVIFA10 ,8) NPVA $ 12,705,187 12 EACA $ 12,705,187 12 (PVIFA10 ,8) EACA $ 2,381,511 32 And the NPV and EAC for Machine B is NPVB $ 4,210,000 1,561,895(PVIFA10 ,11) NPVB $ 14,354,606 26 EACB $ 14,354,606 26 (PVIFA10 ,11) EACB $ 2,210,080 28 You should choose Machine B since it has a more positive EAC

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Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,350,000 and will last for 5 years.

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,350,000 and will last for 5 years. Variable costs are 39 percent of sales, and fixed costs are $122,000 per year. Machine B costs $4,570,000 and will last for 7 years. Variable costs for this machine are 31 percent of sales and fixed costs are $85,000 per year. The sales for each machine will be $9.14 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? (Do not round your intermediate calculations.)

	(Click to select)$3,089,285.92$-4,352,700.5$-4,810,879.5$-2,851,714.08$-10,810,240

(b)	If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B? (Do not round your intermediate calculations.)

	(Click to select)$-7,444,468.73$-2,607,163.13$3,333,836.87$-8,228,097.01$-12,692,762.06

THE SCREENSHOT BELOW SHOWS HOW THE CALCULATION NEEDS TO BE DONE!! PLEASE FOLLOW THE STEPS AS SHOWN BELOW!!

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Since we need to calculate the EAC for each machine, sales are irrelevant. EAC only uses the costs of operating the equipment, not the sales. Using the bottom up approach, or net income plus depreciation, method to calculate OCF, we get: Variable costs Fixed costs Depreciation EBT Tax Net income + Depreciation OCF Machine A $-3,031,200 -164,000 -265,000 $-3,460,200 1,211,070 $-2,249,130 265,000 $-1,984,130 Machine B $-2,526,000 -83,000 -382,727 $-2,991,727 1,047,105 $-1,944,622 382,727 $-1,561,895 The NPV and EAC for Machine A is: NPVA = $-2,120,000 -1,984,130(PVIFA10%,8) NPVA = $-12,705,187.12 EACA = $-12,705,187.12 / (PVIFA10%,8) EACA = $-2,381,511.32 And the NPV and EAC for Machine B is: NPVB = $-4,210,000 -1,561,895(PVIFA10%,11) NPVB = $-14,354,606.26 EACB = $-14,354,606.26 / (PVIFA10%,11) EACB = $-2,210,080.28 You should choose Machine B since it has a more positive EAC