Question 10 (of 10) O. Award: 3.33 out of 10.00 points You are evaluating two di

Question

Question 10 (of 10) O. Award: 3.33 out of 10.00 points 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 $69,000 per year. The Techron II costs $450,000, has a five- year life, and has pretax operating costs of $42,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $46,000. If your tax rate is 35 percent and your discount rate is 9 percent, compute the EAC for both machines. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) TechronI Techron II EAC s 107,553.16 $ 106,495.58 Which machine do you prefer? Techron II References Worksheet Difficulty: Basic

Explanation / Answer

EAC = Net Present Value of asset (NPV) + Annual maintenance cost

NPV = (Price of asset-salvage value) x discount rate / [1 - (1 + Discount Rate) -Years]

Calculating NPVs:

Techron 1 = (258000-46000) x .09 / [1-(1+.09)-3]

= 212000 x .09 / [1 - 0.77218] = 212000 x .09 / .22782 = 83,750.33

Techron 2 = (450000-46000) x .09 / [1-(1+.09)-5]

= 404000 x .09 / [1 - 0.64993] = 404000 x .09 /.35007 = 103,864.94

Calculating EAC:

Techron 1 = 83,750.33 + 69,000 = $152,750.33

Techron 2 = 103,864.94? + 42,000 = $145,864.94

Hence, Techron 2 is preferable.

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