Vandelay Industries is considering the purchase of a new machine for the production oflatex. Machine A costs $3,210,000 and will last for six years. Variable costs are 37percent of sales, and fixed costs are $350,000 per year. Machine B costs $5,455,000and will last for nine years. Variable costs for this machine are 32 percent of sales andfixed costs are $240,000 per year. The sales for each machine will be $12.4 million peryear. The required return is 9 percent, and the tax rate is 24 percent. Both machines willbe depreciated on a straight-line basis. The company plans to replace the machine whenit wears out on a perpetual basis.Calculate the EAC for each machine. (A negative answer should be indicated by aminus sign. Do not round intermediate calculations and enter your answers in dollars,not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)Answer is complete but not entirely correct.System A$-4,473,627.60 XSystem B$-4,090,361.10

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Answered: Vandelay Industries is considering the…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...

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Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
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