Problem:
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 7 years. Variable costs are 34 percent of sales, and fixed costs are $136,000 per year. Machine B costs $4,730,000 and will last for 11 years. Variable costs for this machine are 31 percent of sales and fixed costs are $92,000 per year. The sales for each machine will be $9.46 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.
Required:
Question 1: If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A?
Question 2: If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B?
Note: Please provide reasons to support your answer.