Question

You are evaluating two different silicon wafer milling machines. The Techron I costs $234,000, has a three-year life, and has pretax operating costs of $61,000 per year. The Techron II costs $410,000, has a five-year life, and has pretax operating costs of $34,000 per year. For both milling machines, use straight-line depreciation to zero over the projectâs life and assume a salvage value of $38,000. If your tax rate is 35 percent and your discount rate is 10 percent.

Required:
Compute the EAC for both machines.

Answer 1

T-1:

Table-1 vide annex

Applying EAC formula

c = \frac{r(NPV)}{(1-(1+r)^{-n} )}

`c = (r(NPV))/((1-(1+r)^(-n) ))`

c: equivalent annuity cash flow

NPV: Net present value

r: rate per period

n: number of periods

we have

`c = (0.1*(-246155.15))/((1-(1+0.1)^(-3) ))`

c = $ - 98 982,63

T-2

Table-2 vide annex

Applying EAC formula

c = \frac{r(NPV)}{(1-(1+r)^{-n} )}

`c = (r(NPV))/((1-(1+r)^(-n) ))`

c: equivalent annuity cash flow

NPV: Net present value

r: rate per period

n: number of periods

we have

`c = (0.1*(-369644.05))/((1-(1+0.01)^(-5) ))`

c = - $ 97 511.17