Chocoholics Anonymous wants to modernize its production machinery. The company's sales are $8.5 million per year, and the choice of machine won't impact that amount. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis. Machine Amaretto costs $2,170,000 and will last for 6 years. Variable costs are 35 percent of sales, and fixed costs are $169,000 per year. Machine Baileys costs $4,250,000 and will last for 9 years. Variable costs for this machine are 28 percent of sales and fixed costs are $120,000 per year. Required:
(a) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine Amaretto? (Do not round your intermediate calculations.) HINT: In EAC problems you first need to find the NPV. Using this NPV you can then calculate the annuity (annual cost) that has the same present value/cost. The lecture videos include a detailed example of this calculation.
(b) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine Baileys?