You are evaluating two different silicon wafer milling machines. The Techron I c
ID: 2772034 • Letter: Y
Question
You are evaluating two different silicon wafer milling machines. The Techron I costs $237,000, has a three-year life, and has pretax operating costs of $62,000 per year. The Techron II costs $415,000, has a five-year life, and has pretax operating costs of $35,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $39,000. If your tax rate is 34 percent and your discount rate is 8 percent, compute the EAC for both machines.
Explanation / Answer
Calculation of Equivalent Annual Cost (EAC) for both machines
Techron I
Techron II
Life (Years)
3
5
Cost of Machine (A)
$ 237,000.00
$ 415,000.00
Post Tax operating costs (B)
$ 40,920.00
$ 23,100.00
62000*(1-34%)
35000*(1-34%)
Tax Saving on Depreciation (C)
$ 22,440.00
$ 25,568.00
= ((Cost - Salvage Value)/life)*Tax Rate
((237000 - 39000)/3)*34%
((415000 - 39000)/5)*34%
Net Annual Cost (D) = B-C
$ 18,480.00
$ (2,468.00)
PVAF (E)
$ 2.5771
$ 3.9927
PVAF (3 Years , 8%)
PVAF (5 Years , 8%)
Present value F = D*E
$47,624.75
($9,854.01)
Total Present value of Costs G = A+F
$ 284,624.75
$ 405,145.99
PVAF (E)
$ 2.5771
$ 3.9927
EAC = G/E
$ 110,443.94
$ 101,471.43
Calculation of Equivalent Annual Cost (EAC) for both machines
Techron I
Techron II
Life (Years)
3
5
Cost of Machine (A)
$ 237,000.00
$ 415,000.00
Post Tax operating costs (B)
$ 40,920.00
$ 23,100.00
62000*(1-34%)
35000*(1-34%)
Tax Saving on Depreciation (C)
$ 22,440.00
$ 25,568.00
= ((Cost - Salvage Value)/life)*Tax Rate
((237000 - 39000)/3)*34%
((415000 - 39000)/5)*34%
Net Annual Cost (D) = B-C
$ 18,480.00
$ (2,468.00)
PVAF (E)
$ 2.5771
$ 3.9927
PVAF (3 Years , 8%)
PVAF (5 Years , 8%)
Present value F = D*E
$47,624.75
($9,854.01)
Total Present value of Costs G = A+F
$ 284,624.75
$ 405,145.99
PVAF (E)
$ 2.5771
$ 3.9927
EAC = G/E
$ 110,443.94
$ 101,471.43
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.