Question

Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the SAL 5000 and the HAL 1000. The company would need six SALs, and each SAL costs $3,650 and requires $390 of maintenance each year. At the end of the computer’s eight-year life, each one could be sold for $190. Alternatively, the company could buy five HALs. Each HAL costs $3,800 and requires $445 of maintenance every year. Each HAL lasts for six years and has a resale value of $185 at the end of its economic life. The company will continue to purchase the model that it chooses today into perpetuity, and the tax rate is 24 percent. Assume that the maintenance costs occur at year-end. Depreciation is straight-line to zero. What is the EAC of each model if the appropriate discount rate is 11 percent? (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) EAC for SAL 5000= EAC for HAL 1000=

Answer 1

Comutation of EAC
Partculars	SAL 5000	HAL 1000
Life	8 Years	6 Years
A. Initai Investment	(21,900)	(19,000)
B. Annual Cost
Maintenance	(390)	(445)
Depreciation	(2,738)	(3,167)
Annual Cost before Tax	(3,128)	(3,612)
Tax Saving@24%	751	867
Annual Cash Flows	361	422
PVAF@11%	5.1461	4.2305
Present value of Annual Cash Flows	1,856	1,784
C. Salvage Value
After 6 years		925
Less:- Tax@24%		(222)
Net Cash Flow		703
After 8 years	1,140
Less:- Tax@24%	(274)
Net Cash Flow	866
residual Cash Flow	866	703
Present Value of reidual Cash flow
PV@11%	0.4339	0.5346
Present Value of reidual Cash flow	376	376
NPV	(19,668)	(16,840)
PVAF@11%	5.1461	4.2305
EAC = NPV/PVAF	(3,821.98)	(3,980.51)

Present Value Factor Table

Years	PVF@11%	PVF@11%
1	0.9009	0.9009
2	0.8116	0.8116
3	0.7312	0.7312
4	0.6587	0.6587
5	0.5935	0.5935
6	0.5346	0.5346
7	0.4817
8	0.4339
PVAF@11%	5.1461	4.2305