You are evaluating two different silicon wafer milling machines. The Techron I c
ID: 2766482 • Letter: Y
Question
You are evaluating two different silicon wafer milling machines. The Techron I costs $258,000, has a three-year life, and has pretax operating costs of $69,000 per year. The Techron II costs $450,000, has a five-year life, and has pretax operating costs of $42,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $46,000. If your tax rate is 35 percent and your discount rate is 9 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 $
Explanation / Answer
EAC = NPV / At,r
Techron I
Year
0
1
2
3
Initial Value
$258,000.00
$0.00
$0.00
$0.00
Less: Operating Cost
$0.00
$69,000.00
$69,000.00
$69,000.00
Less: Depreciation
$0.00
$86,000.00
$86,000.00
$86,000.00
Add: Residual Value
$0.00
$0.00
$0.00
$46,000.00
EBIT
$0.00
-$155,000.00
-$155,000.00
-$109,000.00
Less: Tax @ 35%
$0.00
-$54,250.00
-$54,250.00
-$38,150.00
Net Income
$0.00
-$100,750.00
-$100,750.00
-$70,850.00
Add: Depreciation
$0.00
$86,000.00
$86,000.00
$86,000.00
Net Cash Flow
$258,000.00
-$14,750.00
-$14,750.00
$15,150.00
Depreciation = $258,000/3 = $86,000
NPV = -$258,000 + [(-$14,750)/(1.09)] + [(-$14,750)/(1.09)2] + [($15,150)/(1.09)3] = -$245,184.09
At,r = {[1] – [(1) / (1+r)t]}/r => {[1] – [(1) / (1+0.09)3]}/0.09 = 2.531294666
EAC = -$245,184.09/2.531294666 = -$96,861.14
Techron II
Year
0
1
2
3
4
5
Initial Value
$450,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
Less: Operating Cost
$0.00
$42,000.00
$42,000.00
$42,000.00
$42,000.00
$42,000.00
Less: Depreciation
$0.00
$90,000.00
$90,000.00
$90,000.00
$90,000.00
$90,000.00
Add: Residual Value
$0.00
$0.00
$0.00
$0.00
$0.00
$46,000.00
EBIT
$0.00
-$132,000.00
-$132,000.00
-$132,000.00
-$132,000.00
-$86,000.00
Less: Tax @ 35%
$0.00
-$46,200.00
-$46,200.00
-$46,200.00
-$46,200.00
-$30,100.00
Net Income
$0.00
-$85,800.00
-$85,800.00
-$85,800.00
-$85,800.00
-$55,900.00
Add: Depreciation
$0.00
$90,000.00
$90,000.00
$90,000.00
$90,000.00
$90,000.00
Net Cash Flow
$450,000.00
$4,200.00
$4,200.00
$4,200.00
$4,200.00
$34,100.00
Depreciation = $450,000/5 = $90,000
NPV = -$450,000 + [($4,200)/(1.09)] + [($4,200)/(1.09)2] + [($4,200)/(1.09)3] + [($4,200)/(1.09)4] + [($34,100)/(1.09)5] = -$414,230.52
At,r = {[1] – [(1) / (1+r)t]}/r => {[1] – [(1) / (1+0.09)5]}/0.09 = 3.889651263
EAC = -$245,184.09/2.531294666 = -$106,495.54
Techron I
Year
0
1
2
3
Initial Value
$258,000.00
$0.00
$0.00
$0.00
Less: Operating Cost
$0.00
$69,000.00
$69,000.00
$69,000.00
Less: Depreciation
$0.00
$86,000.00
$86,000.00
$86,000.00
Add: Residual Value
$0.00
$0.00
$0.00
$46,000.00
EBIT
$0.00
-$155,000.00
-$155,000.00
-$109,000.00
Less: Tax @ 35%
$0.00
-$54,250.00
-$54,250.00
-$38,150.00
Net Income
$0.00
-$100,750.00
-$100,750.00
-$70,850.00
Add: Depreciation
$0.00
$86,000.00
$86,000.00
$86,000.00
Net Cash Flow
$258,000.00
-$14,750.00
-$14,750.00
$15,150.00
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