Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,100,000 and will last for 4 years. Variable costs are 38 percent of sales, and fixed costs are $150,000 per year. Machine B costs $4,310,000 and will last for 7 years. Variable costs for this machine are 27 percent of sales and fixed costs are $115,000 per year. The sales for each machine will be $8.62 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.

a) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A?

b) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B?

2. A stock has an expected return of 18 percent, its beta is 1.4, and the expected return on the market is 14 percent. What must the risk-free rate be? (Do not round your intermediate calculations.)