Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $261,000, has a...

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 II 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?
Techron I
Techron II
Business   Accounting   
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Answer #1
Annual Depreciation
Techron I Techron II
Orginal cost 261000 455000
Less: Salvavge 47000 47000
Depreciable amount 214000 408000
Divide: Life 3 3
Annual depreciation 71333 136000
Computation of EAC
Techron I Techron II
Annual operating cost -70,000 -43000
Less: Tax sheild on cost @ 35%
Techron-I (70000+71333)35% 49467
Ttechron II (43000+136000)35% 62650
Net cash flows -20533 19650
Annuity factor for 3 years 2.5313 2.5313
Present value of cashflows -51975.2 49740.05
Less: Initial investment -261000 -455000
Present value of cash outflows -312975 -405260
Divide: Annuity factor for 3 years 2.5313 2.5313
EAC -123642 -160100
Hence, Techron-I shall be selected
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