You are evaluating two different silicon wafer milling machines. The Techron I c
ID: 2817616 • Letter: Y
Question
You are evaluating two different silicon wafer milling machines. The Techron I costs $279,000, has a three-year life, and has pretax operating costs of $45,600 per year. The Techron II costs $385,000, has a five-year life, and has pretax operating costs of $48,600 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $23,000. Assume the tax rate is 35 percent and the discount rate is 12 percent. (Techron 2 is the answer for the second part)
You are evaluating two different silicon wafer milling machines. The Techron I costs $279,000, has a three-year life, and has pretax operating costs of $45,600 per year. The Techron II costs $385,000, has a five-year life, and has pretax operating costs of $48,600 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $23,000. Assume the tax rate is 35 percent and the discount rate is 12 percent. (Techron 2 is the answer for the second part)
value: 25.00 points You are evaluating two different silicon wafer milling machines. The Techron I costs $279,000, has a three- year life, and has pretax operating costs of $45,600 per year. The Techron ll costs $385,000, has a five- year life, and has pretax operating costs of $48,600 per year. For both milling machines, use straight-line 35 percent and the discount rate is 12 percent. Requirement 1: Compute the EAC for both the machines. (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) EAC Techron I Techron II Requirement 2: Which machine would you prefer?Explanation / Answer
Answer 1.
Techron I:
Initial Cost = $279,000
Useful Life = 3 years
Annual Depreciation = Initial Cost / Useful Life
Annual Depreciation = $279,000 / 3
Annual Depreciation = $93,000
Annual OCF = Pretax Operating Cost * (1 - tax) + tax * Depreciation
Annual OCF = -$45,600 * (1 - 0.35) + 0.35 * $93,000
Annual OCF = $2,910
Salvage Value = $23,000
After-tax Salvage Value = $23,000 * (1 - 0.35)
After-tax Salvage Value = $14,950
NPV = -$279,000 + $2,910 * PVIFA(12%, 3) + $14,950 * PVIF(12%, 3)
NPV = -$279,000 + $2,910 * 2.4018 + $14,950 * 0.7118
NPV = -$261,369.35
EAC = NPV / PVIFA(12%, 3)
EAC = -$261,369.35 / 2.4018
EAC = -$108,822.28
Techron II:
Initial Cost = $385,000
Useful Life = 5 years
Annual Depreciation = Initial Cost / Useful Life
Annual Depreciation = $385,000 / 5
Annual Depreciation = $77,000
Annual OCF = Pretax Operating Cost * (1 - tax) + tax * Depreciation
Annual OCF = -$48,600 * (1 – 0.35) + 0.35 * $77,000
Annual OCF = -$4,640
Salvage Value = $23,000
After-tax Salvage Value = $23,000 * (1 - 0.35)
After-tax Salvage Value = $14,950
NPV = -$385,000 - $4,640 * PVIFA(12%, 5) + $14,950 * PVIF(12%, 5)
NPV = -$385,000 - $4,640 * 3.6048 + $14,950 * 0.5674
NPV = -$393,243.64
EAC = NPV / PVIFA(12%, 5)
EAC = -$393,243.64 / 3.6048
EAC = -$109,088.89
Answer 2.
According to EAC rule, machine with lowest annual cost should be preferred. So, Techron I should be preferred.
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