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31 July, 04:59

You are evaluating two different silicon wafer milling machines. The Techron I costs $245,000, has a three-year life, and has pretax operating costs of $63,000 per year. The Techron II costs $420,000, has a five-year life, and has pretax operating costs of $35,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $40,000. If your tax rate is 22 percent and your discount rate is 10 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.)

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  1. 31 July, 05:09
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    Techron I

    EAC = - $120,263.94

    Techron II

    EAC = - $114,504.27

    Explanation:

    Techron I

    Cost of Machine = $245,000

    Useful Life = 3 years

    Annual Depreciation = Cost of Machine / Useful Life

    Annual Depreciation = $245,000 / 3

    Annual Depreciation = $81,666.67

    Salvage Value = $40,000

    After-tax Salvage Value = $40,000 * (1 - 0.22)

    After-tax Salvage Value = $31,200

    Annual OCF = Pretax Operating Costs * (1 - tax) + tax * Depreciation

    Annual OCF = - $63,000 * (1 - 0.22) + 0.22 * $81,666.67

    Annual OCF = - $31,173.33

    NPV = - $245,000 - $31,173.33 * PVIFA (10%, 3) + $31,200 * PVIF (10%, 3)

    NPV = - $245,000 - $31,173.33 * 2.4869 + $31,200 * 0.7513

    NPV = - $299,084.39

    EAC = NPV / PVIFA (10%, 3)

    EAC = - $299,084.39 / 2.4869

    EAC = - $120,263.94

    Techron II:

    Cost of Machine = $420,000

    Useful Life = 5 years

    Annual Depreciation = Cost of Machine / Useful Life

    Annual Depreciation = $420,000 / 5

    Annual Depreciation = $84,000

    Salvage Value = $40,000

    After-tax Salvage Value = $40,000 * (1 - 0.22)

    After-tax Salvage Value = $31,200

    Annual OCF = Pretax Operating Costs * (1 - tax) + tax * Depreciation

    Annual OCF = - $35,000 * (1 - 0.22) + 0.22 * $84,000

    Annual OCF = - $8,820

    NPV = - $420,000 - $8,820 * PVIFA (10%, 5) + $31,200 * PVIF (10%, 5)

    NPV = - $420,000 - $8,820 * 3.7908 + $31,200 * 0.6209

    NPV = - $434,062.78

    EAC = NPV / PVIFA (10%, 5)

    EAC = - $434,062.78 / 3.7908

    EAC = - $114,504.27
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