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 $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.

Explanation / Answer

Tax Rate (T) = 35%

R = 10%

For Techron I

Initial cost = $240000

Life (n) = 3 years

Annual operating cost = $63000

Salvage value = $40,000

Present value of total cost = initial investment + present value of annual operating cost – Present value of salvage value

Present value of total cost = 240000 + 63000*(1-1/(1+R)^n)/R - 40000/(1+R)^n

Present value of total cost = 240000 + 63000*(1-1/(1+10%)^3)/10% - 40000/(1+10%)^3

Present value of total cost = $366619.1

To calculate, equivalent annual cost (EAC), present value of EAC should be equal to present value of total cost.

Present value of total cost = $366619.1 = EAC*(1-1/(1+R)^n)/R = EAC*(1-1/1.1^3)/.1

366619.1 = EAC*2.4868

EAC = 366619.1 / 2.4868

EAC = $147426.05

For Techron 2

Initial cost = $420000

Life (n) = 5 years

Annual operating cost = $36000

Salvage value = $40,000

Present value of total cost = initial investment + present value of annual operating cost – Present value of salvage value

Present value of total cost = 420000 + 36000*(1-1/(1+R)^n)/R - 40000/(1+R)^n

Present value of total cost = 420000 + 36000*(1-1/(1+10%)^5)/10% - 40000/(1+10%)^5

Present value of total cost = $531631.5

To calculate, equivalent annual cost (EAC), present value of EAC should be equal to present value of total cost.

Present value of total cost = $531631.5 = EAC*(1-1/(1+R)^n)/R = EAC*(1-1/1.1^5)/.1

$531631.5 = EAC*3.79

EAC = 531631.5 / 3.79

EAC = 140272.16

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.