Question
Vandalay 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.
Vandalay 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. Variables costs are 35% of sales, and fixed costs are $195,000 per year. Machine B costs $5,700,000 and will last for nine years. Variables costs for this machine are 30% of sales, and fixed costs are $165,000 per year. The sales from each machine will be $12 million per year. The required return is 10% and the tax rate is 35%. Both machines are 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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