Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $258,000, has a three-year life, and has pretax operating costs of $46,800 per year. The Techron II costs $350,000, has a five-year life, and has pretax operating costs of $54,900 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $29,000. Assume the tax rate is 40 percent and the discount rate is 12 percent.

Requirement 1: Compute the EAC for both the machines. (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))

Answer 1

Techron l

Calculation of cashout flow

Year	0	1	2	3
Purchase Price	258,000	0	0	0
Less: operating cost		46,800	46,800	46,800
Less:Depreciation(258,000-29,000)/3		76,333.33	76,333.33	76,333.33
Add: salvage Amount				29,000
Earning Before Interest and Tax	0	-123,133.33	-123,133.33	-94,133.33
Tax @40%		49,253.33	49,253.33	37,653.33
Net Income		-73,880	-73,880	-56,480
Add Depreciation		76,333.33	76,333.33	76,333.33
Net Cash Flow	-258,000	2,453.33	2,453.33	19,853.33

Present Value of cash outflow

Year	Cash outflow	Present value factor@12%	P.V of Cash Flow
0	-258,000	1	-258,000
1	2,453.33	0.89	2,183.46
2	2,453.33	0.80	1,962.66
3	19,853.33	0.71	14,095.86
NPV			-238,758.02

PVIF for three years @12% is 2.40

Techron ll

Calculation of cashout flow

Year	0	1	2	3	4	5
Purchase Price	350,000	0	0	0
Less: operating cost		54,900	54,900	54,900	54,900	54,900
Less:Depreciation(350,000-29,000)/5		64,200	64,200	64,200	64,200	64,200
Add: salvage Amount						29,000
Earning Before Interest and Tax	0	-119,100	-119,100	-119,100	-119,100	-90,100
Tax @40%		47,640	47,640	47,640	47,640	36,160
Net Income		-71,460	-71,460	-71,460	-71,460	-53,940
Add Depreciation		64,200	64,200	64,200	64,200	64,200
Net Cash Flow	-350,000	-7,260	-7,260	-7,260	-7,260	10,260

Present Value of cash outflow

Year	Cash outflow	Present value factor@12%	P.V of Cash Flow
0	-350,000	1	-350,000
1	-7,260	0.89	-6,461.4
2	-7,260	0.80	-5,808
3	-7,260	0.71	-5,155
4	-7,260	0.64	-4,646.4
5	10,260	0.57	5,848.2
NPV			-366,222.6

PVIF for three years @12% is 3.60