Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $245,000, has a three-year life, and has pretax operating costs of $63,000 per year. The Techron II costs $420,000, 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 $40,000. If your tax rate is 22 percent and your discount rate is 10 percent, compute the EAC for both machines. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Techron I

EAC = -$120,263.94

Techron II

EAC = -$114,504.27

Explanation:

Techron I

Cost of Machine = $245,000

Useful Life = 3 years

Annual Depreciation = Cost of Machine / Useful Life

Annual Depreciation = $245,000 / 3

Annual Depreciation = $81,666.67

Salvage Value = $40,000

After-tax Salvage Value = $40,000 × (1 - 0.22)

After-tax Salvage Value = $31,200

Annual OCF = Pretax Operating Costs × (1 - tax) + tax × Depreciation

Annual OCF = -$63,000 × (1 - 0.22) + 0.22 × $81,666.67

Annual OCF = -$31,173.33

NPV = -$245,000 - $31,173.33 × PVIFA(10%, 3) + $31,200 × PVIF(10%, 3)

NPV = -$245,000 - $31,173.33 × 2.4869 + $31,200 × 0.7513

NPV = -$299,084.39

EAC = NPV / PVIFA(10%, 3)

EAC = -$299,084.39 / 2.4869

EAC = -$120,263.94

Techron II:

Cost of Machine = $420,000

Useful Life = 5 years

Annual Depreciation = Cost of Machine / Useful Life

Annual Depreciation = $420,000 / 5

Annual Depreciation = $84,000

Salvage Value = $40,000

After-tax Salvage Value = $40,000 × (1 - 0.22)

After-tax Salvage Value = $31,200

Annual OCF = Pretax Operating Costs × (1 - tax) + tax × Depreciation

Annual OCF = -$35,000 × (1 - 0.22) + 0.22 × $84,000

Annual OCF = -$8,820

NPV = -$420,000 - $8,820 × PVIFA(10%, 5) + $31,200 × PVIF(10%, 5)

NPV = -$420,000 - $8,820 × 3.7908 + $31,200 × 0.6209

NPV = -$434,062.78

EAC = NPV / PVIFA(10%, 5)

EAC = -$434,062.78 / 3.7908

EAC = -$114,504.27