Question

10. Calculating EAC You are evaluating two different silicon wafer milling machines. The Techron I costs $490,000, has a three-year life, and has pretax operating costs of $90,000 per year. The Techron II costs $620,000, has a five-year life, and has pretax operating costs of $97,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $76,000. If your tax rate is 35 percent and your discount rate is 14 percent, compute the EAC for both machines. Which do you prefer? Why?

Answer 1

Solution :

The EAC of Techron I = - $ 198,029.62

= - $ 198,030 ( when rounded off to the nearest whole number )

The EAC of Techron II = - $ 192,772.39

= - $ 192,772 ( when rounded off to the nearest whole number )

Techron II is to be preferred.

Techron II is preferred, as it has a lower EAC of - $ 192,772.39

Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.

03.11.2019 - Microsoft Excel ? A - DES FILE HOME А в PAGE LAYOUT FORMULAS DATA REVIEW VIEW INSERT с Z Sl.No. Year Particulars PV Factor @ Discounted Cash 14% outflows (7) (8) = (6) * (7) 1949 (4) 1 Cash outflow Year 1 2 Cash outflow Year 2 3 Cash outflow Year 3 3 Cash Inflow Year 3 - Salvage value Statement showing calculation of EAC of Techron! Pre-tax Depreciation Total cost before Tax @ 35% Total cost after Addback: Total cash Operating costs = 490000/ 3 = tax shield (4) = (3) * 0.35 tax shield Depreciation outflows = (1) 163,333.33 (3) = (1) +(2) (5) = (3) - (4) (6) = (5) + (4) (2) $ -90,000.00 $ -163,333.33 $ -253,333.33 $ -88,666.67 $ -164,666.67 $ 163,333.33 $ -1,333.33 $ -90,000.00 $ -163,333.33 $ -253,333.33 $ -88,666.67 $ -164,666.67 $ 163,333.33 $ -1,333.33 $ -90,000.00 $ -163,333.33 $ -253,333.33 $ -88,666.67 $ -164,666.67$ 163,333.33 $ -1,333.33 $ 76,000.00 $ - $ 76,000.00 $ 26,600.00 $ 49,400.00 $ $ 49,400.00 Total of discounted cash outflows = SUM(M3:M6) Initial Investment $ -490,000.00 Net Total cash Outflows = (5) + (6) PVIFA at 14% for 3 years EAC = (7)/(8) = Total of cash outflows / PVIFA at 14% for 3 years 0.8772 $ 0.7695 $ 0.6750 $ 0.6750 $ $ 1.0000 $ $ -1,169.59 -1,025.96 -899.96 33,343.59 30,248.08 - 490,000.00 -459,751.92 2.3216 - 198,029.62 $

03.11.2019 - Microsoft Excel JESSE FILE HOME INSERT ДА В с PAGE LAYOUT FORMULAS DATA REVIEW VIEW H PV Factor @ Discounted Cash 14% outflows (7) (8) = (6) * (7) Statement showing calculation of EAC of Techron II Sl.No. Year Particulars Pre-tax Depreciation Total cost before Tax @ 35% Total cost after Addback: Total cash Operating costs = 620000/ 5 = tax shield (4) = (3) * 0.35 tax shield Depreciation outflows = (1) 124,000 (3) = (1)+(2) (5) = (3) - (4) (4) (6) = (5) + (4) (2) 1 Cash outflow Year 1 $ -97,000.00 $ 124,000.00 $ -221,000.00 $ -77,350.00 $ 143,650.00 $ 124,000.00 $ 19,650.00 2 Cash outflow Year 2 $ -97,000.00 $ 124,000.00 $ -221,000.00 $ -77,350.00 $ 143,650.00 $ 124,000.00 $ -19,650.00 3 Cash outflow Year 3 $ -97,000.00 $ -124,000.00 $ -221,000.00 $ -77,350.00 $ -143,650.00 $ 124,000.00 $ -19,650.00 4 Cash outflow Year 4 $ -97,000.00 $ -124,000.00 $ -221,000.00 $ -77,350.00 $ -143,650.00 $ 124,000.00 $ - 19,650.00 5 Cash outflow Year 5 $ -97,000.00 $ - 124,000.00 $ -221,000.00 $ -77,350.00 $ -143,650.00 $ 124,000.00 $ -19,650.00 6 5 Cash Inflow Year 5 - Salvage value $ 76,000.00 $ - $ 76,000.00 $ 26,600.00 $ 49,400.00 $ - $ 49,400.00 Total of discounted cash outflows = SUM(M31:M36) Initial Investment $ -620,000.00 Net Total cash Outflows = (7) + (8) PVIFA at 14% for 5 years EAC = (9)/(10) = Total of cash outflows / PVIFA at 14% for 5 years Uw 0.8772 $ 0.7695 $ 0.6750 $ 0.5921 $ 0.5194 $ 0.5194 $ $ 1 $ $ 1 $ -17,236.84 -15,120.04 -13,263.19 -11,634.38 -10,205.59 25,656.81 -41,803.23 -620,000.00 -661,803.23 3 .4331 192,772.39 bo