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 $69,000 per year. The Techron II costs $450,000, has a five-year life, and has pretax operating costs of $42,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $46,000. If your tax rate is 25 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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Asked Feb 9, 2020
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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 $69,000 per year. The Techron II costs $450,000, has a five-year life, and has pretax operating costs of $42,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $46,000. If your tax rate is 25 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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Expert Answer

Step 1

Equivalent Annual cost (EAC) is the total cost incurred by the company annually for operating and maintaining an asset within that company.

Net present value is the present value of the future cash flows at a specified time period and discount rate. Discount rate is the minimum rate of lending which is also known as cost of capital.

Given Information:

Finance homework question answer, step 1, image 1

Step 2

Formulae used:

Finance homework question answer, step 2, image 1

Step 3

Calculations for Company T (I):

Firstly, calculate the depreciation by suing straight line method:

Finance homework question answer, step 3, image 1

To calculate the NPV, net cash flows are required which are calculated as follows:

Finance homework question answer, step 3, image 2

By using excel sheet or above formula, the NPV can be calculated which is as follows:

Finance homework question answer, step 3, image 3

By using above formula calculations for the PVIFA@10% for three years and EAC are as follows:

Finance homework question answer, step 3, image 4

...

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