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.)

EAC   Techron I $   Techron II $

Explanation / Answer

Ans.:)

Total cash inflow & outflow evaluation:

Equivalent annual cost

Machine I = net cash outflow / present value annuity factor for 3 years @ 10% = 246155.15/2.4869 = 98982.62 $

Machine II = net cash outflow / present value annuity factor for 5 years @ 10% = 369644.05/3.7908 = 97511.16 $

Conclusion: Machine -II should be selected because it has a lower cash outflow.

Notes: Taxsaving on depreciation (Machine -I 234000/3 Years * 35 %, Machine -II 410000/5years * 35%), Net cash receipt on solvage value (Both Machines - (38000 - 38000*35%) = 24700),Tax saving on Operating expenses (Machine - I 61000*35% = 21350,Machine - II 34000*35% = 11900) shall be treated as Inflows so calculation was done accordingly.

Present Value factor shall be calculated in following manner:

I hope that u r satisfied with my explanation even if u have any doubt please ping me.

Techron-I Techron-II Particulars Period Amounts Present Value factors @ 10% Net cash outflows Period Amounts Present Value factors @ 10% Net cash outflows Cash Outflow Cash of machine 0 year 234000 1 234000 0 year 410000 1 410000 Annual pretax operating expenses 1 to 3 years 61000 2.4869 151697.97 1 to 5 years 34000 3.7908 128886.75 Tax expenses on Solvage value 3 rd year 13300 0.7513 9992.49 5 th year 13300 0.6209 8258.25 Cash inflows Cash Inflow from solvage value 3 rd year 38000 0.7513 28549.96 5 th year 38000 0.6209 23595.01 Tax saving on Operating Expenses 1 to 3 years 21350 2.4869 53094.29 1 to 5 years 11900 3.7908 45110.36 Tax saving on Depreciation 1 to 3 years 27300 2.4869 67891.06 1 to 5 years 28700 3.7908 108795.58 TOTAL NET CASH OUTFLOW 246155.15 TOTAL NET CASH OUTFLOW 369644.05

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