Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,310,000 and will last for 4 years. Variable costs are 37 percent of sales and fixed costs are $157,000 per year. Machine B costs $4,520,000 and will last for 8 years. Variable costs for this machine are 32 percent of sales and fixed costs are $130,000 per year. The sales for each machine will be $9,040,000 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.
If the company plans to replace the machine when it wears out on a perpetual basis, the EAC for machine A is $ and the EAC for machine B is $ . Therefore, you should choose machine B or A. (Negative amount should be indicated by a minus sign. Round answer to the nearest whole dollar amount, e.g. 32.)© BrainMass Inc. brainmass.com October 24, 2018, 10:56 pm ad1c9bdddf
Tax rate = 35%
Salvage value= $0
Life= 4 years
Therefore, Annual depreciation= $577,500 =$2,310,000./4
Tax shield provided by depreciation=Tax rate x Annual depreciation= $202,125 =35.%x$577,500.
Less Variable costs @ 37% = $3,344,800 =37.%x$9,040,000.
Contribution= $5,695,200 =$9,040,000. - $3,344,800.
Less Fixed Costs $157,000
Earnings before taxes= $5,538,200 =$5,695,200. - $157,000.
Tax @ 35% = $1,938,370 =35.%x$5,538,200.
Profit after ...
Selecting Between Alternative Investments
1. Two computer systems are being compared. System A has a life expectancy of 5 years and will cost $14,000 plus $2,000 annually for maintenance. System B has life expectancy of 3 years and will cost $9,000 plus $700 annually for maintenance. System A will generate about $10,000 income and system B will generate about $9,000. Each system will be depreciated using straight line depreciation over their respective lives and company is in a 30% tax bracket. Which system should you choose?
2. A new machine will cost your firm $50,000. It will be depreciated over 5 years with a salvage value at the end of 5 years of $2,000. It is expected that the machine will produce $18,000 in income the first year and an additional 5% growth in income in each subsequent year for up to 6 years. The operating costs the first year are $3,000. These will rise at a rate of $2,000 per year up to a maximum of $14,000. Your company is in a 35% tax bracket. You want to realize a return on your investment of at least 15%. At what point should you consider selling the equipment?View Full Posting Details