Question

ou are evaluating two different silicon wafer milling machines. The Techron I costs $252,000, has a three-year life, and has pretax operating costs of $67,000 per year. The Techron II costs $440,000, has a five-year life, and has pretax operating costs of $40,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $44,000. If your tax rate is 23 percent and your discount rate is 12 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.)

Answer 1

EAC:
			Techron I	Techron II
Annual cost			67000	40000
Less: tax @ 23%			15410	9200
Net after tax cost			51590	30800
Less: tax shhield on dep			19320	20240
			(252000/3*0.23)	(440000/5*0.23)
After tax annual cost			32270	10560
Multiply: PVF at 12%			2.40183	3.60478
Present value of Annual cost			77507.05	38066.477
Initial invstment			252000	440000
Total Outflows			329507.1	478066.48
Less: After tax salvavge			24115.11	19224.427
			(44000*0.77*0.71178)	(44000*0.77*0.567427)
Net outflows			305391.9	458842.05
Divide: Annuity PVF			2.40183	3.60478
EAC			127149.7	127287.12