Calculating EAC . You are evaluating two different silicon wafer milling machine
ID: 2724501 • Letter: C
Question
Calculating EAC. You are evaluating two different silicon wafer milling machines. The Techron I costs $270,000, has a three year life, and has pretax operating costs of $69,000 per year. The Techron II costs $475,000, has a five-year life, and has pretax operating costs of $36,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume salvage value of $45,000. If your tax rate is 35% and your discount rate is 10%, compute the EAC for both machines. Which do you prefer? Why?
Explanation / Answer
The present value of costs associated with the Machine Techron I =
= 270,000 + 69,000 * PVIFA 3 years, 10% - 45,000 * PVIF3 year, 10% --------- (1)
The Values of PVIFA 3 years, 10% = 2.487 and PVIF3 year, 10% = 0.751
After inserting the above values in the equation 1, we get,
= 270,000 + 69,000 * 2.487 + 45,000* 0.751
= 270,000 + 171,603 - 33,795 = 407,808
Therefore, EAC of the Machine Techron I = 407,808 / PVIFA 3 years, 10% = 407,808 / 2.487 = $ 163,975
The EAC of the Machine Techron I = $ 163,975
The present value of costs associated with the Machine Techron II =
= 475,000 + 36,000 * PVIFA 5 years, 10% - 45,000 * PVIF5 year, 10% --------- (2)
The Values of PVIFA 5 years, 10% = 3.791 and PVIF5 year, 10% = 0.621
After inserting the above values in the equation 2, we get,
= 475,000 + 36,000 * 3.791 + 45,000* 0.621
= 475,000 + 136,476 - 27,945 = 583,531
Therefore, EAC of the Machine Techron I = 585,531 / PVIFA 5 years, 10% = 583,531 / 3.791 = $ 153,925
The EAC of the Machine Techron II = $ 153,925
Based on the above analysis, EAC of Machine Techron II is less than Machine Techron I
Therefore, Prefer Machine Techron II.
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