Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $255,000, has a three-year life, and has pretax operating costs of $68,000 per year. The Techron II costs $445,000, has a five-year life, and has pretax operating costs of $41,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $45,000. 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.)

	EAC
Techron I	$
Techron II	$

Answer 1

Step 1: Calculation of NPV

-Techron I

1) Initial Cash flow (t0)

-255000

2) In between Cash flow (t1-t3)

Revenue	-
Less: Pretax operating cost	68,000.00
Less: Depreciation (255000/3)	85,000.00
PBT	(153,000.00)
Less: Tax@34%	(52,020.00)
PAT	(100,980.00)
Add: Depreciation	85,000.00
Cash flow after tax	(15,980.00)

3) Terminal Cash flow (t3)

Salvage Vale	45,000.00
Less: WDV	0
Profit on sale	45,000.00
Less: Tax @34% on above	15,300.00
Net Salvage Vale (45000-15300)	29,700.00

4) NPV

Year	Cashflow	PVF@8%	Cashflow*PVF
0	(255,000)	1	(255,000.00)
1	(15,980)	0.9259	(14,796.30)
2	(15,980)	0.8573	(13,700.27)
3	13,720	0.7938	10,891.38

NPV = PV of Inflows - PV of Outflows

= -255000-14796.30-13700.27+10891.38

= -272605.19

-Techron II

1) Initial Cash flow (t0)

-445000

2) In between Cash flow (t1-t5)

Revenue	-
Less: Pretax operating cost	41,000.00
Less: Depreciation (445000/5)	89,000.00
PBT	(130,000.00)
Less: Tax@34%	(44,200.00)
PAT	(85,800.00)
Add: Depreciation	89,000.00
Cash flow after tax	3,200.00

3) Terminal Cash flow (t3)

Salvage Vale	45,000.00
Less: WDV	0
Profit on sale	45,000.00
Less: Tax @34% on above	15,300.00
Net Salvage Vale (45000-15300)	29,700.00

4) NPV

Year	Cashflow	PVF@8%	Cashflow*PVF
0	(445,000)	1	(445,000.00)
1	3,200	0.9259	2,962.96
2	3,200	0.8573	2,743.48
3	3,200	0.7938	2,540.26
4	3,200	0.7350	2,352.10
5	32,900	0.6806	22,391.19

NPV = PV of Inflows - PV of Outflows

= (2962.96+2743.48+2540.26+2352.10+22391.19) - 445000

= 32989.99-445000

= -412010.01

Step 2: Calculation of EAC

-Techron I

EAC = NPV /(1-(1+r)^-n)/r

= -272605.19 / (1-(1+.08)^-3)/.08

= -272605.19/ 2.57709698725

= -105779.95

-Techron II

EAC = NPV /(1-(1+r)^-n)/r

= -412010.01 / (1-(1+.08)^-5)/.08

= -412010.01 / 3.99271003708

= -103190.57