You are evaluating two different silicon wafer milling machines. The Techron I c

Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $234,000, has a three-year life, and has pretax operating costs of $61,000 per year. The Techron II costs $410,000, has a five-year life, and has pretax operating costs of $34,000 per year. For both milling machines, use straight-line depreciation to zero over the projects life and assume a salvage value of $38,000. If your tax rate is 35 percent and your discount rate is 10 percent, compute the EAC for both machines.

EAC machine 1?

EAC machine 2

Explanation / Answer

Machine 1

Annuity factor = =(1-1/1.1^3)/10% = 2.4868

EAC = 246,155.15/ 2.4868 = $98,982.63

Machine 2

Annuity factor = =(1-1/1.1^5)/10% = 3.79

EAC = 369,644.05/3.79 =  97,511.17

0 1 2 3 Initial cost -234000 Pretax costs -61000 -61000 -61000 Depreciation 33.33% 33.33% 33.33% Depreciation -78000 -78000 -78000 Net income -90350 -90350 -90350 Market value 38000 Book value 0 Cash flow from sale of asset 24700 Change in working capital Recovery of working capital Net cash flow -234000 -12350 -12350 12350 NPV                      (246,155.15)

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