You are evaluating two different silicon wafer milling machines. The Techron I c

Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $261,000, has a three- year life, and has pretax operating costs of $70,000 per year. The Techron Il costs $455,000, has a five- year life, and has pretax operating costs of $43,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $47,000. If your tax rate is 35 percent and your discount rate is 9 percent, compute the EAC for both machines. (A negative answer 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 do you prefer? O Techron I Techron I

Explanation / Answer

Depreciation of first Techron 1= (261,000-47,000)/3 = 71,333.33

Deprection tax savings of Techron 1 = 71333.33*0.35 = 24,966.67

Depreciation for Techron 2 = (455,000-47,000)/5 = 81,600

Depreciation tax savings for Techron 2 = 81,600*0.35 = 28,560

After tax salavge value at the end of the life = 47,000*(1-0.35) = 30,550

The NPV of Techron 1 is calculated as shown in the table below:

EAC = NPV*r/(1-(1+r)^-n) =-351,402*0.09/(1-1.09^-3) = -$138,823.20

EAC for Techron 1 =-$138,823.20

The NPV of Techron 2 is calculated as shown in the table below:

EAC for Techron 2 = NPV*r/(1-(1+r)^-n) = 491,311.16*0.09/(1-1.09^-5) = -126,312.39

EAC for Techron 1 =-$126,312.39

Since EAC for Techron 2 is lower, Techron II is preferred

Techron 1 Year 0 1 2 3 Initial cost -261000 Operating costs -70000 -70000 -70000 Depreciation tax savings 24966.67 24966.67 24966.67 After tax salavge value 30550 Net costs -261000 -45033.3 -45033.3 -14483.3 NPV at 9% $ -351,402.42

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