Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,160,000 and will last for six years. Variable costs are 38 percent of sales, and fixed costs are $300,000 per year. Machine B costs $5,390,000 and will last for nine years. Variable costs for this machine are 33 percent of sales and fixed costs are $215,000 per year. The sales for each machine will be $11.9 million per year. The required return is 11 percent, and the tax rate is 24 percent. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

1, Calculate the EAC for each machine. System A System B

2.

Which machine should the company choose?

Machine A

Machine B