Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,900,000 and will last for six years….

Vandalay Industries is considering the purchase of a new machine for the production of latex.

Machine A costs $2,900,000 and will last for six years. Variable costs are 35% of sales and fixed

costs are $170,000 per year. Machine B costs $5,100,000 and will last for nine years. Variable

costs for this machine are 30% of sales and fixed costs are $130,000 per year. The sales for each

machine will be $10 million per year. The required return is 10% and the tax rate is 35%. Both

machines will be depreciated straight-line over their lifetimes.

a.

What are the equivalent annual costs of each machine?

b. Which machine should Vandalay Industries select?