You are evaluating two different silicon wafer milling machines. The Techron I c
ID: 2791106 • Letter: Y
Question
You are evaluating two different silicon wafer milling machines. The Techron I costs $219,000, has a three-year life, and has pretax operating costs of $56,000 per year. The Techron II costs $385,000, has a five-year life, and has pretax operating costs of $29,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $33,000. 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 $ Which machine do you prefer? Techron I Techron IIYou are evaluating two different silicon wafer milling machines. The Techron I costs $219,000, has a three-year life, and has pretax operating costs of $56,000 per year. The Techron II costs $385,000, has a five-year life, and has pretax operating costs of $29,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $33,000. 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 $ Which machine do you prefer? Techron I Techron II
You are evaluating two different silicon wafer milling machines. The Techron I costs $219,000, has a three-year life, and has pretax operating costs of $56,000 per year. The Techron II costs $385,000, has a five-year life, and has pretax operating costs of $29,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $33,000. 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 $ Which machine do you prefer? Techron I Techron II
Explanation / Answer
Techron I:
Cost = $219,000
Salvage Value = $33,000
Life of Machine = 3 years
Pretax Operating Costs = $56,000
Annual Depreciation = $219,000 / 3
Annual Depreciation = $73,000
After-tax Salvage Value = $33,000 * (1 - 0.34)
After-tax Salvage Value = $21,780
Annual OCF = (-Pretax Operating Cost)*(1-tax) + tax*Depreciation
Annual OCF = -$56,000 * (1 - 0.34) + 0.34 * $73,000
Annual OCF = -$12,140
PVIFA(8%, 3) = 2.5771
PVIF(8%, 3) = 0.7938
NPV = -$219,000 + (-$12,140) * PVIFA(8%, 3) + $21,780 * PVIF(8%, 3)
NPV = -$219,000 - $12,140 * 2.5771 + $21,780 * 0.7938
NPV = -$232,997.03
EAC = NPV / PVIFA(8%, 3)
EAC = -$232,997.03 / 2.5771
EAC = -$90,410.55
Techron II:
Cost = $385,000
Salvage Value = $33,000
Life of Machine = 5 years
Pretax Operating Costs = $29,000
Annual Depreciation = $385,000 / 5
Annual Depreciation = $77,000
After-tax Salvage Value = $33,000 * (1 - 0.34)
After-tax Salvage Value = $21,780
Annual OCF = (-Pretax Operating Cost)*(1-tax) + tax*Depreciation
Annual OCF = -$29,000 * (1 - 0.34) + 0.34 * $77,000
Annual OCF = $7,040
PVIFA(8%, 5) = 3.9927
PVIF(8%, 5) = 0.6806
NPV = -$385,000 + $7,040 * PVIFA(8%, 5) + $21,780 * PVIF(8%, 5)
NPV = -$385,000 + $7,040 * 3.9927 + $21,780 * 0.6806
NPV = -$342,067.92
EAC = NPV / PVIFA(8%, 5)
EAC = -$342,067.92 / 3.9927
EAC = -$85,673.33
So, Techron II should be preferred.
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