You
are evaluating two different silicon wafer milling machines. The
Techron I costs $222,000, has a threeyear life, and has pretax
operating costs of $57,000 per year. The Techron II costs $390,000, has a
fiveyear life, and has pretax operating costs of $30,000 per year. For
both milling machines, use straightline depreciation to zero over the
project’s life and assume a salvage value of $34,000. If your tax rate
is 35 percent and your discount rate is 9 percent, compute the EAC for
both machines. (Negative amounts
should be indicated by a minus sign. Do not round intermediate
calculations and round your final answers to 2 decimal places. (e.g.,
32.16))
Which do you prefer? 

Techron II 
Explanation:
We
will need the aftertax salvage value of the equipment to compute the
EAC. Even though the equipment for each product has a different initial
cost, both have the same salvage value. The aftertax salvage value for
both is:

To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I is: 
OCF = −$57,000(1 − 0.35) + 0.35($222,000/3) = −$11,150 
NPV = −$222,000 − $11,150(PVIFA_{9}_{%,3}) + ($22,100/1.09^{3}) = −$233,158.68 
EAC = −$233,158.68 / (PVIFA_{9}_{%,3}) = −$92,110.45 
And the OCF and NPV for Techron II is: 
OCF = −$30,000(1 − 0.35) + 0.35($390,000/5) = $7,800 
NPV = −$390,000 + $7,800(PVIFA_{9}_{%,5}) + ($22,100/1.09^{5}) = −$345,297.24 
EAC = −$345,297.24 / (PVIFA_{9}_{%,5}) = −$88,773.31 
The
two milling machines have unequal lives, so they can only be compared
by expressing both on an equivalent annual basis, which is what the EAC
method does. Thus, you prefer the Techron II because it has the lower
(less negative) annual cost.
