Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $258,000, has a three-year life, and has pretax operating costs of $46,800 per year. The Techron II costs $350,000, has a five-year life, and has pretax operating costs of $54,900 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $29,000. Assume the tax rate is 40 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	$

   

Answer 1

Computation of EAC

Particulars	Techron I	Techron II
Initial Outlay	-258000	-350000
Present value of operating cost {(post tax operating cost + tax benefit on depreciation)(PVIFA 12%, n years)} Techron I: {-46800(1-0.40)+(258000/3)(0.40)}*PVIFA(12%,3 years) i.e. 2.402 Techron II: {-54900(1-0.40)+(350000/5)(0.40)}*PVIFA(12%, 5years) i.e. 3.605	15180.64	-17808.70
Present value of salvage value Techron I 29000(1-0.40)*PVF(12%,3year) i.e. 0.712 Techron II 29000(1-0.40)*PVF (12%,5year) i.e. 0.567	12388.80	9865.80
	230430.56	357942.90
PVAF(12%, 3years) PVAF(12%,5years)	2.4018	3.6047
Equivalent Annual Cost Techron I: 230430.56/2.4018 Techron II: 357942.90/3.6047	95940.77	99298.94

Advice: Since EAC is least in case of Techron I same should be opted.