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Alexander Industries is considering the purchase of a new machine for the production of latex. Machine A costs $4,900,000 and will last for five years. Variable costs are 35% of sales and fixed costs are $170,000 per year. Machine B costs $8,100,000 and will last for eleven years. Variable costs for this machine are 30% of sales and fixed costs are $130,000 per year. The sales for each machine will be $10 million per year. The required return is 10% and the tax rate is 35%. Both machines will be depreciated straight-line over their lifetimes.
a. What are the equivalent annual costs of each machine?
b. Which machine should Alexander Industries select?
Please show all the steps and formulas.
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