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

Question

You are evaluating two different silicon wafer milling machines. The Techron l costs $249,000, has a three- year life, and has pretax operating costs of $66,000 per year The Techron ll costs $435,000, has a five- year life, and has pretax operating costs of $39,000 per year. For both m ng machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $43,000. 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).) EAC Techron I Techron ll Which machine should you choose? Techron ll Techron

Explanation / Answer

Computation of EAC for both Machines

P V of salvage value =$43000* PVIF(6.5%,3 year)

=$43000*PVIF(6.5%,5 year)

Discounting factor after tax = 10%(1-0.35)=6.5%

EAC is high incase of Techron I,so it is advise to purchase Techron II.

Machines- Techron I Techron II Purchase Cost($)-D 249000 435000 Life of machines(Years) 3 5 Running Costs per year($)-A 66000 39000 Cummulative Presesnt value factor for 1-3 years@6.5%-B 2.648 Cummulative Presesnt value factor for 1-5 years@6.5%-C 4.156

P V of salvage value =$43000* PVIF(6.5%,3 year)

=$43000*PVIF(6.5%,5 year)

35597.51 31384.88 PV of Running CostsE=A*B,A*C 174768 162084 PV of Cash outflows(D+E) 423768 597084 Less:PV of salvage value 35597.51 31384.88 Net PV of cash outflows 388170.49 565699.12 Equated annual cashoutflow =Net PV of cashoutflows/B,C 157281.39 136116.25

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