Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $252,000, has a 3-year life, and has pretax operating costs of $67,000 per year. The Techron Il costs $440,000, has a 5-year life, and has pretax operating costs of $40,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $44,000. If your tax rate is 23 percent and your discount rate is 12 percent, compute the EAC for both machines. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) $ Techron! Techron 11 - 127,149.64 -127,287.24 $ Which machine do you prefer? Techron 11 Techron!

Answer 1

Solution :

The EAC of Techron I = - $ 127,149.64

The EAC of Techron II = - $ 127,287.24

The machine that should be preferred is Techron I as it has a lower EAC of - $ 127,149.64, when compared to Techron II.

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

27.05.2020 - Excel File Home Insert Page Layout Formulas Data Review View Help Tell me what you want to do A B C J L M 1 Sl.No. Year Particulars 1 2 3 4 5 6 2 1 Cash outflow Year 1 2 Cash outflow Year 2 3 Cash outflow Year 3 3 Cash Inflow Year 3 - Salvage value E G Н K Statement showing calculation of EAC of Techron 1 Pre-tax Depreciation Total cost Tax @ 23% Total cost Addback: Total cash Operating = 252000/ 3 before tax (4) = (3) * 0.23 after tax Depreciation outflows costs = 84000 shield shield (2) (6) = (5) + (2) = (1) (2) (3) = (1) + (2) (5) = (3) - (4) $-67,000.00 $-84,000.00 $-151,000.00 $ -34,730.00 $-116,270.00 $ 84,000.00 $ -32,270.00 $-67,000.00 $-84,000.00 $-151,000.00 $ -34,730.00 $-116,270.00 $ 84,000.00 $ -32,270.00 $-67,000.00 $-84,000.00 $-151,000.00 $ -34,730.00 $-116,270.00 $ 84,000.00 $ -32,270.00 $ 44,000.00 $ $ 44,000.00 $ 10,120.00 $ 33,880.00 $ $ 33,880.00 Total of discounted cash outflows = SUM(M3:M6) Initial Investment $ -252,000.00 Net Total cash Outflows = (5) + (6) PVIFA at 12% for 3 years EAC = (7)/(8) = Total of cash outflows / PVIFA at 12% for 3 years EAC ( When rounded off to two decimal places ) 3 PV Discounted Cash Factor @ outflows 12 % (8) = (6) * (7) (7) 0.8929 $ -28,812.5000 0.7972 $ -25,725.4464 0.7118$ -22,969.1486 0.7118$ 24,115.1148 $ -53,391.9802 1.0000 $ -252,000.0000 $ -305,391.9802 $ 2.4018 $ -127,149.6396 $ -127,149.64 4 5 7 8 6 0 9 7 10 8 11 9 12 10 13 14 15 16 17 18 1 2 3 19 20 Statement showing calculation of EAC of Techron II Sl.No. Year Particulars Pre-tax Depreciation Total cost Tax @ 23% Total cost Addback : Total cash PV Discounted Cash Operating = 440000/ 5 before tax (4) = (3) * 0.23 after tax Depreciation outflows Factor @ outflows costs = 88000 shield shield (2) (6) = (5) + (2) 12% (8) = (6) * (7) = (1) (2) (3) = (1) + (2) (5) = (3) - (4) (7) 1 Cash outflow Year 1 $-40,000.00 $-88,000.00 $-128,000.00 $ -29,440.00 $ -98,560.00 $ 88,000.00 $ -10,560.00 0.8929 $ -9,428.5714 2 Cash outflow Year 2 $-40,000.00 $-88,000.00 $-128,000.00 $ -29,440.00 $ -98,560.00 $ 88,000.00 $ -10,560.00 0.7972 $ -8,418.3673 3 Cash outflow Year 3 $-40,000.00 $-88,000.00 $-128,000.00 $ -29,440.00 $ -98,560.00 $ 88,000.00 $ -10,560.00 0.7118 $ -7,516.3994 4 4 Cash outflow Year 4 $-40,000.00 $-88,000.00 $-128,000.00 $ -29,440.00 $ -98,560.00 $ 88,000.00 $ -10,560.00 0.6355 $ -6,711.0709 5 Cash outflow Year 5 $-40,000.00 $-88,000.00 $-128,000.00 $ -29,440.00 $ -98,560.00 $ 88,000.00 $ -10,560.00 0.56741 $ -5,992.0276 6 5 Cash Inflow Year 5 - Salvage value $ 44,000.00 $ $ 44,000.00 $ 10,120.00 $ 33,880.00 $ $ 33,880.00 0.5674 $ 19,224.4219 Total of discounted cash outflows = SUM(M17:M22) $ -18,842.0148 8 0 Initial Investment $-440,000.00 1.0000 $ -440,000.0000 9 Net Total cash Outflows = (7) + (8) $ -458,842.0148 10 PVIFA at 12% for 5 years $ 3.6048 11 EAC = (9)/(10) = Total of cash outflows / PVIFA at 12% for 5 years $ -127,287.2403 12 EAC ( When rounded off to two decimal places ) $ -127,287.24 21 in 22 23 7 24 25 26 27 28 29 30