You are evaluating two different silicon wafer milling machines. The Techron I c
ID: 2718966 • Letter: Y
Question
You are evaluating two different silicon wafer milling machines. The Techron I costs $237,000, has a three-year life, and has pretax operating costs of $62,000 per year. The Techron II costs $415,000, has a five-year life, and has pretax operating costs of $35,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $39,000. If your tax rate is 34 percent and your discount rate is 8 percent, compute the EAC for both machines.
Explanation / Answer
Details Techron I Techron II Cost 237,000 415,000 Useful Life 3 5 Yearly depreciation 79,000 83,000 Pretax opearting cost/year 62,000 35,000 Tax rate 34% 34% Post tax Opearting Cost 40,920 23,100 Less :Depreciation Tax shield 26,860 28,220 Net Post Tax Oprating Cost 14,060 (5,120) Salvage Value 39,000 39,000 PosT Tax Salvage Value 25,740 25,740 Techron I Taking a 15 year cycle for equal comaprison Investment Salvage Net Opearting cost Total Operating Cost Discount factor @8% PV of costs Year 0 237,000 237,000 1 237,000 Year 1 14,060 14,060 0.9259 13,019 Year 2 14,060 14,060 0.8573 12,054 Year 3 14,060 14,060 0.7938 11,161 Year 4 237,000 25,740 14,060 225,320 0.7350 165,617 Year 5 14,060 14,060 0.6806 9,569 Year 6 14,060 14,060 0.6302 8,860 Year 7 14,060 14,060 0.5835 8,204 Year 8 237,000 25,740 14,060 225,320 0.5403 121,733 Year 9 14,060 14,060 0.5002 7,034 Year 10 14,060 14,060 0.4632 6,513 Year 11 14,060 14,060 0.4289 6,030 Year 12 237,000 25,740 14,060 225,320 0.3971 89,478 Year 13 14,060 14,060 0.3677 5,170 Year 14 14,060 14,060 0.3405 4,787 Year 15 25,740 14,060 (11,680) 0.3152 (3,682) 8.5595 702,546 Annuity Factor @8% depreciation is 8.5595 EAC = PV of costs/Annuity factor =702546/8.5595 = 82,078 So EAC for Techron I =82078 Techron II Investment Salvage Net Opearting cost Total Operating Cost Discount factor @8% PV of costs Year 0 415,000 415,000 1 415,000 Year 1 (5,120) (5,120) 0.9259 (4,741) Year 2 (5,120) (5,120) 0.8573 (4,390) Year 3 (5,120) (5,120) 0.7938 (4,064) Year 4 (5,120) (5,120) 0.7350 (3,763) Year 5 415,000 25,740 (5,120) 384,140 0.6806 261,439 Year 6 (5,120) (5,120) 0.6302 (3,226) Year 7 (5,120) (5,120) 0.5835 (2,987) Year 8 (5,120) (5,120) 0.5403 (2,766) Year 9 (5,120) (5,120) 0.5002 (2,561) Year 10 415,000 25,740 (5,120) 384,140 0.4632 177,931 Year 11 (5,120) (5,120) 0.4289 (2,196) Year 12 (5,120) (5,120) 0.3971 (2,033) Year 13 (5,120) (5,120) 0.3677 (1,883) Year 14 (5,120) (5,120) 0.3405 (1,743) Year 15 25,740 (5,120) (30,860) 0.3152 (9,728) 8.5595 808,288 Annuity Factor @8% depreciation is 8.5595 EAC = PV of costs/Annuity factor =808288/8.5595 = 94,432 So EAC for Techron II =94432
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