Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $219,000, has a three-year life, and has pretax operating costs of $56,000 per year. The Techron Il costs $385,000, has a five-year life, and has pretax operating costs of $29,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $33,000. If your tax rate is 34 percent and your discount rate is 8 percent, compute the EAC for both machines. (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) $ Techron I Techron II EAC -16490.37 -62,843.61 Which machine should you choose? Techron1 • Techron II

Answer 1

Solution :

The EAC of Techron I = - $ 90,410.37

The EAC of Techron II = - $ 85,673.19

Since Techron II has the lower equivalent annual cost (EAC) of - $ 85,673.19 , Techron II should be chosen.

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

FILE Sig N DESSE 01.11.2019 - Microsoft Excel ? - HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW А в с - K L M Statement showing calculation of EAC of Techron Sl.No. Year Particulars Pre-tax Depreciation Total cost before Tax @ 34% Total cost after Addback: Total cash PV Factor @ Discounted Cash Operating costs = 219000/ 3 = tax shield (4) = (3) * 0.34 tax shield Depreciation outflows 8 % outflows = (1) 73000 (3) = (1) + (2) (5) = (3) - (4) (4) (6) = (5) + (4) (7) (8) = (6) * (7) (2) 11 1 Cash outflow Year 1 $ -56,000.00 $ -73,000.00 $ -129,000.00 $ -43,860.00 $ -85,140.00 $ 73,000.00 $ -12,140.00 0.9259 $ -11,240.74 2 2 Cash outflow Year 2 $ -56,000.00 $ -73,000.00 $ - 129,000.00 $ -43,860.00 $ -85,140.00 $ 73,000.00 $ -12,140.00 0.8573 $ -10,408.09 3 3 Cash outflow Year 3 $ -56,000.00 $ -73,000.00 $ 129,000.00 $ -43,860.00 $ -85,140.00 $ 73,000.00 $ -12,140.00 0.7938 $ -9,637.12 3 Cash Inflow Year 3 - Salvage value $ 33,000.00 $ - $ 33,000.00 $ 11,220.00 $ 21,780.00 $ - $ 21,780.00 0.7938 $ 17,289.67 Total of discounted cash outflows = SUM(M3:M6) $ 13,996.29 Initial Investment $ 219,000.00 1.0000 $ -219,000.00 Net Total cash Outflows = (5) + (6) $ 232,996.29 PVIFA at 8 % for 3 years 2.5771 EAC = (7)/(8) = Total of cash outflows / PVIFA at 8 % for 3 years $ -90,410.37 000 va A

01.11.2019 - Microsoft Excel ? - PAGE LAYOUT FORMULAS DATA REVIEW VIEW Sig HOME B INSERT C A N Sl.No. Year Particulars Covauw NA 1 Cash outflow Year 1 2 Cash outflow Year 2 3 Cash outflow Year 3 4 Cash outflow Year 4 5 Cash outflow Year 5 5 Cash Inflow Year 5 - Salvage value Statement showing calculation of EAC of Techron II Pre-tax Depreciation Total cost before Tax @ 34% Total cost after Addback: Total cash PV Factor @ Discounted Cash Operating costs = 385000/ 5 = tax shield (4) = (3) * 0.34 tax shield Depreciation outflows 8% outflows = (1) 77000 (3) = (1) +(2) (5) = (3) - (4) (4) (6) = (5) + (4) (7) (8) = (6) * (7) (2) $ -29,000.00 $ 77,000.00 $ 106,000.00 $ -36,040.00 $ -69,960.00 $ 77,000.00 $ 7,040.00 0.9259 $ 6,518.52 $ -29,000.00 $ -77,000.00 $ - 106,000.00 $ -36,040.00 $ -69,960.00 $ 77,000.00 $ 7,040.00 0.8573 $ 6,035.67 $ -29,000.00 $ -77,000.00 $ -106,000.00 $ -36,040.00 $ -69,960.00 $ 77,000.00 $ 7,040.00 0.7938 $ 5,588.58 $ -29,000.00 $ -77,000.00 $ - 106,000.00 $ -36,040.00 $ -69,960.00 $ 77,000.00 $ 7,040.00 0.7350 $ 5,174.61 $ -29,000.00 $ -77,000.00 $ - 106,000.00 $ -36,040.00 $ -69,960.00 $ 77,000.00 $ 7,040.00 0.6806 $ 4,791.31 $ 33,000.00 $ - $ 33,000.00 $ 11,220.00 $ 21,780.00 $ $ 21,780.00 0.6806 $ 14,823.10 Total of discounted cash outflows = SUM(M31:M36) $ 42,931.78 Initial Investment $ -385,000.00 1 $ -385,000.00 Net Total cash Outflows = (7) + (8) $ 342,068.22 PVIFA at 8 % for 5 years 1 3 .9927 EAC = (9)/(10) = Total of cash outflows / PVIFA at 8% for 5 years $ -85,673.19