Question
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,300,000 and will last for 6 years.
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,300,000 and will last for 6 years. Variable costs are 35% of sales, and fixed costs are $1,600,000 per year. Machine B costs $5,040,000 and will last for 9 years. Variable costs for this machine are 30% and fixed costs are $1,950,000 per year. The sales for each machine will be $12 million per year. The required rate of return is 10% and the tax rate is 35%. 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 the company choose?
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