You are evaluating two different silicon wafer milling machines. The Techron I c

Question

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.

Explanation / Answer

Both cases: After-tax salvage value = $47,000(1 – 0.35) = $30,550

To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I is:

OCF = $-70,000(1 – 0.35) + 0.35($261,000/3) = - $15,050

NPV = -261,000 - $15,050(PVIFA9%,3) + ($30,550/1.09 3) = $-275,505.78

EAC = $-275,505.78 / (PVIFA9%,3) = $-108,839.87

And the OCF and NPV for Techron II is:

OCF = $-43,000(1 – 0.35) + 0.35($455,000/5) = - $3,900

NPV = -455,000 + 3,900(PVIFA9%,5) + ($30,550/1.09 5) = $-419,974.96

EAC = $-419,974.96 / (PVIFA9%,5) = $-107,972.39

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