Question

You are evaluating two different silicon wafer milling machines. Machine I costs $120,000, has a 3-year life, and has pretax operating costs of $43,000 per year. Machine II costs $160,000, has a 5-year life, and has pretax operating costs of $20,000 per year. For both machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $20,000. If your tax rate is 34 percent and your discount rate is 12 percent, which one do you prefer to buy, Machine I or Machine II? Why?

Answer 1

Compute the depreciation of the Machine I using the equation as shown below:

Depreciation = Cost - Salvage value / Useful life

= $120,000 - $20,000 / 3

= $33,333.33

Hence, the depreciation is $33,333.33.

Prepare the table to compute the net present value of Machine I using MS-excel as follows:

The result of the above table is as follows:

Hence, the net present value is -$146,707.61.

Compute the depreciation of Machine II using the equation as shown below:

Depreciation = Cost - Salvage value / Useful life

= $160,000 - $20,000 / 5

= $28,000

Hence, the depreciation is $28,000.

Prepare the table to compute the net present value of Machine II using MS-excel as follows:

The result of the above table is as follows:

HHence, the net present value is -$161,917.04.

Machine I should be purchased as its net present value is higher than Machine II