You are evaluating two different silicon wafer milling machines. The Techron I c
ID: 2402204 • Letter: Y
Question
You are evaluating two different silicon wafer milling machines. The Techron I costs $261,000, has a three-year life, and has pretax operating costs of $70,000 per year. The Techron II costs $455,000, has a five-year life, and has pretax operating costs of $43,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $47,000. If your tax rate is 35 percent and your discount rate is 9 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.)
You are evaluating two different silicon wafer milling machines. The Techron I costs $261,000, has a three-year life, and has pretax operating costs of $70,000 per year. The Techron II costs $455,000, has a five-year life, and has pretax operating costs of $43,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $47,000. If your tax rate is 35 percent and your discount rate is 9 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.)
Explanation / Answer
Annual Depreciation Techron I Techron II Orginal cost 261000 455000 Less: Salvavge 47000 47000 Depreciable amount 214000 408000 Divide: Life 3 3 Annual depreciation 71333 136000 Computation of EAC Techron I Techron II Annual operating cost -70,000 -43000 Less: Tax sheild on cost @ 35% Techron-I (70000+71333)35% 49467 Ttechron II (43000+136000)35% 62650 Net cash flows -20533 19650 Annuity factor for 3 years 2.5313 2.5313 Present value of cashflows -51975.2 49740.05 Less: Initial investment -261000 -455000 Present value of cash outflows -312975 -405260 Divide: Annuity factor for 3 years 2.5313 2.5313 EAC -123642 -160100 Hence, Techron-I shall be selected
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