Answer:
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) <u>($92,000)</u>
Profit before tax ($167,000)
Tax (21% x $167,000) <u>$35,070</u>
Profit after tax ($131,930)
Add back Depreciation <u>$92,000</u>
Cash Flow after tax (<u>$39,930)</u>
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) <u>($96,000)</u>
Profit before tax ($144,000)
Tax (21% x $167,000) <u>$30,240</u>
Profit after tax ($113,760)
Add back Depreciation <u>$96,000</u>
Cash Flow after tax (<u>$17,746)</u>
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
