You are evaluating two different silicon wafer milling machines. The Techron I c
ID: 2775234 • Letter: Y
Question
You are evaluating two different silicon wafer milling machines. The Techron I costs $264,000, has a three-year life, and has pretax operating costs of $71,000 per year. The Techron II costs $460,000, has a five-year life, and has pretax operating costs of $44,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $48,000. 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 final answers to 2 decimal places. (e.g., 32.16))
You are evaluating two different silicon wafer milling machines. The Techron I costs $264,000, has a three-year life, and has pretax operating costs of $71,000 per year. The Techron II costs $460,000, has a five-year life, and has pretax operating costs of $44,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $48,000. 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 final answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
After tax salvage value = salvage value (1 -tax)
= 48,000 ( 1 - .34)
= 48000 * .66
= $ 31,680
Operating cash flow for Techron I = - Operating cost (1 -Tax) + tax(depreciation)
= -71000 ( 1- .34) + .34 (26400/3)
= -71000 * .66 + .34*88000
= - 46860 + 29920
= - 16940
NPV = - Initial cost - (operating cash flow *PVAF@8%,3 ) + (salvage *PVF@8%.3)
= - 264,000 - (16940 * 2.57710 ) +(.79383 * 31680 )
= - 264,000 - 43656.07 + 25148.53
= - 282507.54
EAC = NPV /PVAF@8%,3
= -282507.54 / 2.57710
= $ -109,622.27
for TEchron II
Operating cash flow = - 44000 ( 1- .34 ) + .34 (460000 / 5)
= -44000 * .66 + .34 *92000
= -29040 + 31280
= 2240
NPV = Initial cost + (Ooperating cash flow *PVAF@8%,5) + (salvage *PVF@8%,5)
= - 460,000 + (2240 * 3.99271 ) + (31680 * .68058)
= - 460,000 + 8943.67 + 21560.77
= - 429,495.56
EAC = -429,495.56 / 3.99271
= $ -107,569.94
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