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 $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.

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

Discount Rate Techron I Discount Rate Techron II Cost 1 237000 1 415000 Operating Costs 62000 2.577 159774 35000 3.9927 139745 Savings in Taxes -22440 2.577 -57827.88 -42613 3.9927 -170141 Salvage Value -25740 0.793 -20411.82 -25740 0.68 -17503.2 after tax Total 318534.3 367100.9 EAC 318534.3/2.577 367100.9/3.9927 EAC 123606.64 91943.02 As the Equivalent Annual cost of Techron II is less than The EAC of techron I, The Machine Techron II should be accepted Calculation Of Depreciation Techron I 237000-39000/3 66000per year Savings in taxes due to depreciation 66000*34% 22440 Techron II 415000-39000/3 125333 Savings in Taces 125333*34% 42613.22

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