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 final answers to 2 decimal places (e.g., 32.16).) Which machine should you choose?

Explanation / Answer

Answer :-

Techron -1

Investment = 219000

Year = 3 years

Rate = 8%

Operating cost = 56000

Scrap Value = 33000

Depreciation = (219000 - 33000) / 3

= 62000

Total Net Present Value = 219000 + 89007.12 + 82374.84 + 50117.28

= 440499.24

EAC = NPV / PVIFA at ( 8% , 3years )

= 440499.24 / 2.577

= $ 170934.90

Techron -2

Investment = 385000

Year = 5 years

Rate = 8%

Operating cost = 29000

Scrap Value = 33000

Depreciation = (385000 - 33000) / 5

= 70400

Total Net Present Value = 385000+ 58149.09 + 53816.17 + 50048.41 + 46155.06 + 20291.07

= 613459.80

EAC = NPV / PVIFA at ( 8% , 5years )

= 613459.80 / 3.993

= $ 153633.81

Machine 2nd ( Techron - 2 ) Accepted, because its EAC less than the Techron - 1.

Year 0 1 2 3 Investment 219000 Operating cost 56000 56000 56000 Add Depreciation 62000 62000 62000 Operating cost after Depreciation 118000 118000 118000 Add:-Tax saving @ 34% 40120 40120 40120 Operating cost after Depreciation & Tax 158120 158120 158120 Less:- Depreciation 62000 62000 62000 Annual Cost 219000 96120 96120 96120 Less:- Scrap 33000 Annual cost after Scrap 219000 96120 96120 63120 PVIF at 8% 1 .926 .857 .797 Net Present Value 219000 89007.12 82374.84 50117.28

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