Answer:
Techron I
. According to the calculations, Techron I reports a better performance.
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
