You are evaluating two different silicon wafer milling machines. The Techron I c
ID: 2777422 • Letter: Y
Question
You are evaluating two different silicon wafer milling machines. The Techron I costs $213,000, has a three-year life, and has pretax operating costs of $54,000 per year. The Techron II costs $375,000, has a five-year life, and has pretax operating costs of $27,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $31,000. If your tax rate is 30 percent and your discount rate is 9 percent, compute the EAC for both machines. Please show each step. You are evaluating two different silicon wafer milling machines. The Techron I costs $213,000, has a three-year life, and has pretax operating costs of $54,000 per year. The Techron II costs $375,000, has a five-year life, and has pretax operating costs of $27,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $31,000. If your tax rate is 30 percent and your discount rate is 9 percent, compute the EAC for both machines. Please show each step.Explanation / Answer
Techron I
Annual cash outflow = operating cost *(1-tax rate) - Depreciation*tax rate
Annual cash outflow = 54000*(1-30%) - 213000/3*30%
Annual cash outflow = 16500
Post Tax salvage Value = salvage value - tax rate*(salvage value - book value)
Post Tax salvage Value = 31000-30%*(31000-0)
Post Tax salvage Value = 21700
PV of Cost = Initial Investment + Annual cash outflow *PVA(rate,nper) - Post Tax salvage Value *PV(rate,nper)
PV of Cost = 213000 + 16500*PVA(9%,3) - 21700*PV(9%,3)
PV of Cost = 213000 + 16500*2.53129- 21700*0.77218
PV of Cost = $ 238009.98
EAC = PV of Cost / PVA(rate,nper)
EAC = 238009.98/PVA(9%,3)
EAC = 238009.98/2.53129
EAC = $ 94027.15
Techron II
Annual cash outflow = operating cost *(1-tax rate) - Depreciation*tax rate
Annual cash outflow = 27000*(1-30%) - 375000/5*30%
Annual cash outflow = -3600
Post Tax salvage Value = salvage value - tax rate*(salvage value - book value)
Post Tax salvage Value = 31000-30%*(31000-0)
Post Tax salvage Value = 21700
PV of Cost = Initial Investment + Annual cash outflow *PVA(rate,nper) - Post Tax salvage Value *PV(rate,nper)
PV of Cost = 375000 -3600*PVA(9%,5) - 21700*PV(9%,5)
PV of Cost = 375000 -3600*3.88965- 21700*0.64993
PV of Cost = $ 346,893.78
EAC = PV of Cost / PVA(rate,nper)
EAC = 346,893.78/PVA(9%,5)
EAC = 346,893.78/3.88965
EAC = $ 88183.80
Decision : Select Techron II as its Effective Annual cost is lower than Techron I
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