Problem:
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,060,000 and will last for six years. Variable costs are 30 percent of sales, and fixed costs are $205,000 per year. Machine B costs $5,247,000 and will last for nine years. Variable costs for this machine are 25 percent of sales and fixed costs are $140,000 per year. The sales for each machine will be $10.3 million per year. The required return is 9 percent, and the tax rate is 34 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.
Required:
Question 1: Calculate the NPV for each machine.
Question 2: Calculate the EAC for each machine.
Note: Please show how you came up with the solution.