Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 6, Problem 14QP
Comparing Mutually Exclusive Projects Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,100,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $204,000 per year. Machine B costs $6,100,000 and will last for nine years. Variable costs for this machine are 30 percent and fixed costs are $165,000 per year. The sales for each machine will be $13.5 million per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be
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Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,860,000 and will last for 5 years. Variable costs are 40 percent of sales, and fixed costs are $166,000 per year. Machine B costs $4,410,000 and will last for 7 years. Variable costs for this machine are 29 percent of sales and fixed costs are $89,000 per year. The sales for each machine will be $8.82 million per year. The required return is 10 percent and the tax rate is 21 percent. Both machines will be depreciated on a straight-line basis.
1. If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A (
(a)-3,330,803.31
(b) 3,636,996.69
(c) -12,626,365.14
(d) -3,497,343.48
(e) -3,164,263.15
2. If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B
(a) -2,864,510.25
(b) -13,945,635.62
(c) 4,103,289.75
(d) -3,007,735.77
(e) -2,721,284.74
Vandalay Industries is considering the purchase of a new machine for the production of
latex. Machine A costs $2,140,000 and will last for 6 years. Variable costs are 36 percent
of sales, and fixed costs are $125,000 per year. Machine B costs $4,340,000 and will last
for years. Variable costs for this machine are 31 percent of sales and fixed costs are
$78,000 per year. The sales for each machine will be $8.68 million per year. The
required return is 10 percent and the tax rate is 21 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,
what is the EAC for machine A?
EAC
$ -2,983,801.79
$ 3,873,398.21
$-12,995,234.69
$ -3,132,991.88
$ -2,834,611.70
If the company plans to replace the machine when it wears out on a perpetual basis,
what is the EAC for machine B?
EAC
$ -2,886,934.04
$-15,401,580.02
$ 3,970,265.96
$ -3,031,280.74
$ -2,742,587.33
Vandelay Industries is considering the purchase of a new machine for the production of
latex. Machine A costs $3,210,000 and will last for six years. Variable costs are 37
percent of sales, and fixed costs are $350,000 per year. Machine B costs $5,455,000
and will last for nine years. Variable costs for this machine are 32 percent of sales and
fixed costs are $240,000 per year. The sales for each machine will be $12.4 million per
year. The required return is 9 percent, and the tax rate is 24 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. (A negative answer should be indicated by a
minus 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 X
System B
$
-4,090,361.10
Chapter 6 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 6 - Opportunity Cost In the context of capital...Ch. 6 - Prob. 2CQCh. 6 - Incremental Cash Flows Your company currently...Ch. 6 - Depreciation Given the choice, would a firm prefer...Ch. 6 - Prob. 5CQCh. 6 - Prob. 6CQCh. 6 - Equivalent Annual Cost When is EAC analysis...Ch. 6 - Prob. 8CQCh. 6 - Capital Budgeting Considerations A major college...Ch. 6 - To answer the next three questions, refer to the...
Ch. 6 - Prob. 11CQCh. 6 - To answer the next three questions, refer to the...Ch. 6 - Calculating Project NPV Flatte Restaurant is...Ch. 6 - Calculating Project NPV The Best Manufacturing...Ch. 6 - Calculating Project NPV Down Under Boomerang,...Ch. 6 - Calculating Project Cash Flow from Assets In the...Ch. 6 - Prob. 5QPCh. 6 - Project Evaluation Your firm is contemplating the...Ch. 6 - Project Evaluation Dog Up! Franks is looking at a...Ch. 6 - Prob. 8QPCh. 6 - Calculating NPV Howell Petroleum is considering a...Ch. 6 - Calculating EAC You are evaluating two different...Ch. 6 - Cost-Cutting Proposals Massey Machine Shop is...Ch. 6 - Prob. 12QPCh. 6 - Prob. 13QPCh. 6 - Comparing Mutually Exclusive Projects Vandalay...Ch. 6 - Capital Budgeting with Inflation Consider the...Ch. 6 - Prob. 16QPCh. 6 - Prob. 17QPCh. 6 - Cash flow Valuation Phillips Industries runs a...Ch. 6 - Equivalent Annual Cost Bridgton Golf Academy is...Ch. 6 - Prob. 20QPCh. 6 - Prob. 21QPCh. 6 - Prob. 22QPCh. 6 - Calculating Project NPV With the growing...Ch. 6 - Calculating Project NPV You have been hired as a...Ch. 6 - Calculating Project NPV Pilot Plus Pens is...Ch. 6 - EAC and Inflation Office Automation, Inc., must...Ch. 6 - Project Analysis and Inflation Dickinson Brothers,...Ch. 6 - Project Evaluation Aday Acoustics, Inc., projects...Ch. 6 - Calculating Required Savings A proposed...Ch. 6 - Calculating a Bid Price Another utilization of...Ch. 6 - Prob. 31QPCh. 6 - Prob. 32QPCh. 6 - Replacement Decisions Suppose we are thinking...Ch. 6 - Prob. 34QPCh. 6 - Project Analysis and Inflation The Biological...Ch. 6 - Prob. 36QPCh. 6 - Prob. 37QPCh. 6 - Prob. 38QPCh. 6 - Prob. 1MC1Ch. 6 - GOODWEEK TIRES, INC. After extensive research and...
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