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.
What are the equivalent annual costs of each machine?
b. Which machine should Vandalay Industries select?