You are evaluating two different silicon wafer milling machines. The Techron I costs $276,000, has a three-year life, and has pretax operating costs of $75,000 per year. The Techron II costs $480,000, has a five-year life, and has pretax operating costs of $48,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $52,000. If your tax rate is 21 percent and your discount rate is 12 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.)

Techron I

-$154,842

Techron II

-$144,981

Explanation:

Techron I

Cash Flow From Year 1 to Year 3

Pretax operating costs ($75,000)

Depreciation ($276,000 / 3) ($92,000)

Profit before tax ($167,000)

Tax (21% x $167,000) $35,070

Profit after tax ($131,930)

Add back Depreciation $92,000

Cash Flow after tax ($39,930)

Terminal Value = Salvage value - Tax = $52,000 - ($52,000 x 21%) = $41,080

NPV = ($276,000) + [ (39,930) x (1+12%) ^-1] + [ (39,930) x (1+12%) ^-2] + [ (39,930) x (1+12%) ^-3] = ($276,000) + ($35,652) + ($31,832) + ($28,421) = ($371,905)

EAC = NPV / (1 - (1+r) ^-n) / r

EAC = - 371,905 / (1 - (1 + 12%) ^-3/12% = - $154,842

Techron II

Cash Flow From Year 1 to Year 3

Pretax operating costs ($48,000)

Depreciation ($480,000 / 5) ($96,000)

Profit before tax ($144,000)

Tax (21% x $167,000) $30,240

Profit after tax ($113,760)

Add back Depreciation $96,000

Cash Flow after tax ($17,746)

Terminal Value = Salvage value - Tax = $52,000 - ($52,000 x 21%) = $41,080

NPV = ($480,000) + [ (17,746) x (1+12%) ^-1] + [ (17,746) x (1+12%) ^-2] + [ (17,746) x (1+12%) ^-3] = ($480,000) + ($15,845) + ($14,147) + ($12631) = ($522,623)

EAC = NPV / (1 - (1+r) ^-n) / r

EAC = - 522,623 / (1 - (1 + 12%) ^-5/12% = - $144,981