You are evaluating two different silicon wafer milling machines. The Techron I c
ID: 2739130 • Letter: Y
Question
You are evaluating two different silicon wafer milling machines. The Techron I costs $210,000, has a three-year life, and has pretax operating costs of $53,000 per year. The Techron II costs $370,000, has a five-year life, and has pretax operating costs of $26,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $30,000. If your tax rate is 34 percent and your discount rate is 8 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
We will need the after tax salvage value of the equipment to compute the EAC.
After tax salvage value = $30,000 (1-0.34) = $19,800
To calculate the EAC,
we first need the OCF and NPV of each option.
The OCF and NPV for Techron I is:
OCF = - $53,000(1-0.34) + 0.34($210,000/3) = $2,250
=-$53,000 x 0.66 + 0.34 x 70,000
=-$34,980 +23,800
=-$11,180
NPV = -$210,000 + -11,180 (PVIFA8%,3) +($19,800 / 1.083)
=-$210,000 -11,180 x 2.5771 + 19,800 x 0.79383
=-$210,000 - 28,811.94 +15,717.88
=-$238,811.94 +$15,717.88
=$223,094.07
EAC = -$223,097.07 / (PVIFA 8%,3)
=-$223,097/2.5771
=-$86,567.97
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The OCF and NPV for Techron II is:
OCF = - $26,000(1-0.34) + 0.34($370,000/5) = $2,250
=-$26,000 x 0.66 + 0.34 x 74,000
=-$17,160 +25,160
=$8,000
NPV = -$370,000 + 8,000 (PVIFA8%,5) +($19,800 / 1.085)
=-$370,000 +8,000 x 3.99271 + 19,800 x 0.68058
=-$370,000 +31,941.68 + 13,475.55
=-$324,582.77
EAC = -$324,582.77 / (PVIFA 8%,5)
= -$324,582.77/ 3.99271
=-$81,293.85
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