You are evaluating two different silicon wafer milling machines. The Techron I c
ID: 2715772 • Letter: Y
Question
You are evaluating two different silicon wafer milling machines. The Techron I costs $240,000, has a three-year life, and has pretax operating costs of $63,000 per year. The Techron II costs $420,000, has a five-year life, and has pretax operating costs of $36,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $40,000. If your tax rate is 35 percent and your discount rate is 10 percent, compute the EAC for both machines. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
I keep trying to solve this but I can not get the right answer. I complete Dep., tax sheild and OCF first but cant ger the answer I need.
You are evaluating two different silicon wafer milling machines. The Techron I costs $240,000, has a three-year life, and has pretax operating costs of $63,000 per year. The Techron II costs $420,000, has a five-year life, and has pretax operating costs of $36,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $40,000. If your tax rate is 35 percent and your discount rate is 10 percent, compute the EAC for both machines. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
I keep trying to solve this but I can not get the right answer. I complete Dep., tax sheild and OCF first but cant ger the answer I need.
Explanation / Answer
TECHRON I
COST=$2,40,000
LIFE=3 YEARS
PRETAX OPERATING COST=$63,000
DEPRECIATION=(2,40,000-40,000)/3=$66,667
TAX BENEFIT FOR DEPRECIATION=$66,667*35%=$23,333
TECHRON II
COST=$4,20,000
LIFE=4 YEARS
PRETAX OPERATING COST=$36,000
DEPRECIATION=(4,20,000-40,000)/5=$76,000
TAX BENEFIT ON DEPRECIATION =$76,000*35%=$26,600
TAX=35%
DISCOUNT RATE=8%
LIFE (2)
HENCE TECHRON II IS PREFERABLE AS ITS EQUATED ANNUAL COST IS LESS THAN TECHRON I BY$3,262
Note: Discount rate is taken as 8%.
PARTICULARS TECHRON I TECHRON II COST($) (1) 2,40,000 4,20,000LIFE (2)
3 YEARS 5 YEARS PRETAX OPERATING COST (3) 63,000 36,000 OPERATING COST AFTER TAX BENEFIT(4)=(3)-35% 40,950 23,400 TAX BENIFIT ON DEPRECIATION (5) 23,333 26,600 OPERATING COST - TAX BENIFIT ON DEPRECIATION (6)=(4)-(5) 17,617 (3,200) PV FACTOR @8% (7) 2.577 3.993 PRESENT VALUE OF TOTAL COSTS (8)=(6)*(7) 45,399 (12,778) ADD:INITIAL COST(1) 2,40,000 4,20,000 LESS: PV OF SALVAGE VALUE(9) (31,760) (27,240) TOTAL(10)=(8)+(1)+(9) 2,53,639 3,79,982 EQUATED ANNUAL COST (10)/(7) 98,424 95,162Related Questions
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