Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $231,000, has a three-year life, and has pretax operating costs of $60,000 per year. The Techron II costs $405,000, has a five-year life, and has pretax operating costs of $33,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $37,000. If your tax rate is 23 percent and your discount rate is 9 percent, compute the EAC for both machines.

Which machine should you choose?

• Techron I

• Techron II

Answer 1

Solution :

The EAC of Techron I = - $ 111,056.6389

= - $ 111,056.64 ( when rounded off to two decimal places )

The EAC of Techron II = - $ 106,141.9810

= - $ 106,141.98 ( when rounded off to two decimal places )

Techron II should be chosen, as it has lower EAC of - $ 106,141.98 when compared to higher EAC of Techron I of - $ 111,056.64

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.