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 $219,000, has a three-year life, and has pretax operating costs of $56,000 per year. The Techron II costs $385,000, has a five-year life, and has pretax operating costs of $29,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $33,000. If your tax rate is 34 percent and your discount rate is 8 percent, compute the EAC for both machines.

Explanation / Answer

Techron 1 :

Aftertax salvage value = $33,000(1 – 0.34) = $21,780

OCF = -56000*(1-0.34) + (219,000/3)*0.34 = -12,140

NPV = -219,000 - 12,140*PVIFA8%,3 + 21,780/1.08^3 = -232,996.29

EAC = -232,996.29/PVIFA8%,3 = -90,410.37

Techron 2 :

Aftertax salvage value = $33,000(1 – 0.34) = $21,780

OCF = -29,000*(1-0.34) + (385,000/5)*0.34 =7,040

NPV = -385,000 + 7,040*PVIFA8%,5 + 21,780/1.08^5 = -342,068.22

EAC = -342,068.22/PVIFA8%,5 = -85,673.19

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