Vandalay Industries is trying to choose between two alternative (mutually exclusive) machines. Whichever machine is selected will be utilized for the foreseeable future (in addition, for the foreseeable future, all revenues, costs and expenses are expected to remain unchanged).
Machine A costs $2,400,000 and will last (economic life) four years. Variable costs will be 35% of sales, and fixed costs are $180,000 per year. The machine will be depreciated over 3 years, straight line. Sales revenues will be $2,000,000 per year.
Machine B costs $3,300,000 and will last (economic) five years. Variable costs will be 30% of sales, and fixed costs are $110,000 per year. The machine will be depreciated over 3 years, straight line. Sales revenues will be $2,000,000 per year.
The required return is 10% and the tax rate is 40%. Which machine, if either, should Vandalay Industries select? Be sure to provide quantitative justification for your answer.