Chp. 10, #10 You are evaluating two different silicon wafer milling machines. Th

Question

Chp. 10, #10

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 project’s 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. (Negative amounts 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

Year Techron 1 Techron 2 PV of Techron 1 PV of Techron 2

0 -234000 -410000 -234000 -410000

1 -61000 -34000 - 55454.45 - 30909.1

2 -61000 -34000 - 50413.22 - 28099.1

3 -23000 -34000 - 17280.24 - 25544.7

4 -34000 - 23222.45

5 4000 2483.68

NPV -357147.91 -515291.67

EAC for techron 1=357147.91/2.486=-146663.68

EAC for techron 2=515291.67/3.79= -135960.86

Thus, EAC for techron 2 is lower and hence it must be selected.

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