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 $261,000, has a three- year life, and has pretax operating costs of $70,000 per year. The Techron Il costs $455000, has a five- year life, and has pretax operating costs of $43,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $47,000. If your tax rate is 35 percent and your discount rate is 9 percent, compute the EAC for both machines. (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).) EAC Techron I Techron II Which machine should you choose? Techron Techron

Explanation / Answer

Solution: EAC Techron I -108,839.87 Techron II -107,972.43 Machine Techron II to be chosen is as EAC is lower in case of Techron II Techron II Working Notes: Techron I After tax salvage value = $47,000(1 0.35) = $30,550 Operating cash flow = operating cost net of tax + tax saving on depreciation = -70,000(1-0.35) + (261,000/3)x 35% =-45,500 + 30,450 =-15,050 NPV = $261,000 ($15,050 x Cumulative PVF @ 9% 1 to 3 years) + ($30,550/(1.09)^3) = -$261,000 - (15,050 X 2.5312946 ) + 30,550/1.295029 = -261,000-38,095.9837 + 23,590.2053 =-275,505.7784 EAC = 275,505.7784 / Cumulative PVF @ 9% 1 to 3 years EAC= -275,505.7784/2.5312946 EAC= -108,839.87 Techron II After tax salvage value = $47,000(1 0.35) = $30,550 Operating cash flow = operating cost net of tax + tax saving on depreciation = -43,000(1-0.35) + (455,000/5)x 35% =-27,950 + 31,850 =3,900 NPV = $455,000 +3,900 x Cumulative PVF @ 9% 1 to 5 years) + ($30,550/(1.09)^5) = -$455,000 +(3,900 X 3.88965) + 30,550/1.53862395 =-419,974.9611 EAC = 419,974.9611/ Cumulative PVF @ 9% 1 to 5 years EAC= 419,974.9611/3.88965 EAC= -107972.4297 EAC=-107,972.43 Please feel free to ask if anything about above solution in comment section of the question.

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