Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $267,000, has a three-year life, and has pretax operating costs of $72,000 per year. The Techron II costs $465,000, has a five-year life, and has pretax operating costs of $45,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $49,000. If your tax rate is 23 percent and your discount rate is 13 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

Please find the below solution for Techron I

Year	0	1	2	3	Remarks
Initial investment of Techron I	$ (267,000.00)
Operating Cost Post Tax		$   (55,440.00)	$ (55,440.00)	$    (55,440.00)
Depreication Tax Benefit		$    20,470.00	$   20,470.00	$     20,470.00	(267000/3)*23%
Salvage Value				$     49,000.00
Tax on Sale of Machine				$    (11,270.00)
Total cashflow (A)	$(267,000.00)	$ (34,970.00)	$ (34,970.00)	$       2,760.00
PV factor @ 13% (B)	1.00	0.88	0.78	0.69
NPV (A*B)	$ (267,000.00)	$   (30,946.90)	$ (27,386.64)	$        1,912.82
Total NPV				$ (323,420.72)

EAC = NPV/ Annuity Factor

Annuity Factor=
(1− {1/(1+r)^t}) / r
​ where:
r=Cost of capital
t=Number of periods
​ r = 13%

n = 3 years

Annuity Factor = (1-{1/(1+0.13)^3})/0.13

=2.3612

EAC = NPV/ Annuity Factor

=-323420.72/2.3612

= $ (136,975.78)

Please find the below solution for Techron II

Year	0	1	2	3	4	5	Remarks
Initial investment of Techron Ii	$ (465,000.00)
Operating Cost Post Tax		$   (34,650.00)	$ (34,650.00)	$    (34,650.00)	$    (34,650.00)	$    (34,650.00)
Depreication Tax Benefit		$    21,390.00	$   21,390.00	$     21,390.00	$     21,390.00	$     21,390.00	(465000/5)*23%
Salvage Value						$     49,000.00
Tax on Sale of Machine						$    (11,270.00)
Total cashflow (A)	$(465,000.00)	$ (13,260.00)	$ (13,260.00)	$   (13,260.00)	$   (13,260.00)	$     24,470.00
PV factor @ 13% (B)	1.00	0.88	0.78	0.69	0.61	0.54
NPV (A*B)	$ (465,000.00)	$   (11,734.51)	$ (10,384.53)	$      (9,189.85)	$      (8,132.61)	$     13,281.34
Total NPV						$ (491,160.15)

EAC = NPV/ Annuity Factor

Annuity Factor=
(1− {1/(1+r)^t}) / r
​ where:
r=Cost of capital
t=Number of periods
​ r = 13%

n = 5 years

Annuity Factor = (1-{1/(1+0.13)^5})/0.13

=3.5172

EAC = NPV/ Annuity Factor

=$ (491,160.15)/3.5172

= $ ( 139,643.97)