Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $237,000, has a three-year life, and has pretax operating costs of $62,000 per year. The Techron Il costs $415,000, has a five-year life, and has pretax operating costs of $35,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $39,000. If your tax rate is 34 percent and your discount rate is 8 percent, compute the EAC for both machines. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) EAC Techron Techron II Which machine do you prefer? Techron 11 O Techron

Answer 1

Solution: We need the aftertax salvage value of the equipment to compute the EAC and which is same for both the machines. Aftertax salvage value = $39,000 (1 -0.34) Aftertax salvage value = $39,000 x 0.66 Aftertax salvage value = $25,740 To calculate the EAC, we need the OCF (Operating Cash Flows) and NPV( Net Present Value) of each option. The OCF and NPV for Techron I is: OCF=-$62,000(1 -0.34) +0.34($237,000/3) OCF=-$14,060 NPV =-$237,000 - $14,060(PVIFA (8%, 3 Years)* )+($25,740/1.08”) NPV =-$237,000 - $36,233.98 +$20,433.24 NPV =-$252,800.74 EAC =-$252,800.74 / (PVIFA (8%, 3 Years)* EAC =-$98095.16 *PVIFA (8%, 3 Years) = PVF (8%, 1Year) + PVF (8%, 2Year) + PVF (8%, 3Year) *PVIFA (8%, 3Years) = 0.92593 +0.85734 +0.79383 = 2.5771 The OCF and NPV for Techron II is: OCF =-$35,000(1 -0.34) +0.34($415,000/3) OCF=-$23,933.33 NPV =-$415,000 + $23,933.33(PVIFA(8%, 5 years)) + ($25,740/1.08) NPV =-$415,000+ $95,558.85 + $17,518.21 NPV = -$301,922.94 EAC = -$301,922.94 / (PVIFA (8%, 5Years)* EAC =-$75,618.55 *PVIFA (8%, 3Years) = PVF (8%, 1 Year) + PVF (8%, 2Year) + PVF (8%, 3 Year) + PVF (8%, 4Year) + PVF (8%, 5Year) *PVIFA (8%, 3 Years) = 0.92593 +0.85734 +0.79383 +0.73503 +0.68058 = 3.99 I prefer the Techron II because it has the lower (less negative) annual cost.