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 $264,000, has a three-year life, and has pretax operating costs of $71,000 per year. The Techron II costs $460,000, has a five-year life, and has pretax operating costs of $44,000 per year. For both milling machines, use straight-line depreciation to zero over the project

You are evaluating two different silicon wafer milling machines. The Techron I costs $264,000, has a three-year life, and has pretax operating costs of $71,000 per year. The Techron II costs $460,000, has a five-year life, and has pretax operating costs of $44,000 per year. For both milling machines, use straight-line depreciation to zero over the project

Explanation / Answer

In both case

After tax salvage value - $48000(1-0.34) = $31680

For Techron 1 we ve

OCF = -71000(1-0.34) + 0.34(264000/3) = -46860 + 29920 = -$16940

NPV = -$264000 - 16940 (PVIFA 8%,3) + (31680/1.08^3) = -$282507.467

EAC = -$282507.467/ (PVIFA 8%,3) = -$282507.467/2.5771 = -$109622.237

AND

For Techron 2 we ve

OCF = -44000(1-0.34) + 0.34(460000/5) = $2240

NPV = -$460000 +2240 (PVIFA 8%,5) + (31680/1.08^5) = -$429495.476

EAC = -$429495.476/ (PVIFA 8%,5) = -$429495.476/3.9927 = -$107570.18

Since both machines have unequal lines , hence comparison cannot be made on annual basis

We can prefer TECHRON 2 bec it has lower annual cost....

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