Purchase of new machine for the production of latex

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Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,880,000 and will last for 6 years. Variable costs are 39 percent of sales, and fixed costs are $133,000 per year. Machine B costs $4,630,000 and will last for 9 years. Variable costs for this machine are 31 percent of sales and fixed costs are $92,000 per year. The sales for each machine will be $9.26 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.)

(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.)

Reference no: EM132008976

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