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Dalay Industries is considering the purchase of a new machine for the production of latex....

Question:

Dalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,066,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $210,000 per year. Machine B costs $5,256,000 and will last for nine years. Variable costs for this machine are 35 percent of sales and fixed costs are $145,000 per year. The sales for each machine will be $10.4 million per year. The required return is 11 percent, and the tax rate is 30 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.

Calculate the EAC for each machine. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places.

Equivalent Annual Cost:

Commonly known as EAC, the equivalent annual cost is the cost of maintaining an asset over its entire lifetime, expressed as an equal yearly cost. It is calculated by dividing the NPV of the asset by the present value of the annuity factor (PVAF) associated with the required rate of return and the expected life of the asset.

Answer and Explanation:

The EAC's for machines A and B are $3,649,648.62 and $3,563,440.49, respectively.

First, calculate the EAC for Machine A:

The machine will be...

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The Effects of Depreciation on Cash Flow

from Finance 101: Principles of Finance

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