Chapter 10, Problem 24QP

Comparing Mutually Exclusive Projects [LO4] Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,600,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $195,000 per year. Machine B costs $5,200,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $230,000 per year. The sales for each machine will be $10 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. If the company plans to replace the machine when it wears out on a perpetual basis, which machine should it choose?