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. (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.)

EAC

Techron I $

Techron II $

ANSWER IS NOT : 103828.31 or 93098.28

Explanation / Answer

TECHRON I TECHRON II Cost 219000 385000 Pretax operating cost 56000 29000 Salvage value 33000 33000 Expected Life 3 5 Years Tax rate 34% Discount Rate 8% TECHRON I TECHRON II Pretax Operating cost 56000 29000 Depreciation 62000 70400 Profit -6000 -41400 Tax -2040 -14076 Earning after tax -27324 -27324 Add:Dep 59960 70400 Cash inflow after tax 32636 43076 Add: Salvage Value 33000 33000 Net cash inflow 65636 76076 Calculation of NPV of TECHRON I Year (1-2) 58199.779 year 3 52103.826 Total PV 110303.6 Less: Cash Outflow 219000 NPV -108696.4 EAC -42177.795 Calculation of NPV of TECHRON II Year(1-4) 142672.02 year 5 51775.804 Total P.v 194447.82 Less: Cash Outflow 385000 NPV -190552.18 EAC -47725.142 We Prefer TECHRON I because it has lower (less negative ) annual cost.

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