Answer:
EAC techron I = 130,996.7425
EAC techron II = 124,386.7141
I would prefer techron II as their annual cost is lower than techron I
Explanation:
The first step is calculate the NPV of each machine
<u>Techron I</u>
investment 290,000
Depreciation per year
acquisition - salvage value = depreciable amount
depreciable amount / useful life = depreciation per year
290,000 - 40,000 = 250,000
250,000/3 = 83,333
The depreication provides a tax-shield so it lowers the annual cost for the machine.
operating cost x (1-t) - depreciation x t = after-tax operating cost
-67,000 x (1-0.35) +83,333 x 0.35 = 14383.45
Now we calculate the present value of there cash outflow for 3 years
C -14383.45
time 3
rate 0.1
PV -$35,769.51
<u>Now the NPV of the machine Techron I</u>
-290,000 - 35,769.51 = -325.769,51
<u>We do the same for the second machine Techron II</u>
after-tax cost:
depreciation per year:
(510,000-40,000)/5
-35,000 x (1-.035) + 94,000 x 0.35 = 10.150
The tax shield for the depreciation is high enough it makes cost savings rather than cost outflow.
Now we calculate the present value of this aannuity
C 10150
time 5
rate 0.1
PV $38,476.49
<u>And the NPV for Techron II</u>
-510,000 + 38,476.49 = (471,523.51)
Now we are able to calcualte the EAC for each machine:
First Machine Techron I
EAC techron I = 130996.7425
Second Machine Techron II
EAC techron II = 124386.7141