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CHAPTER 10
B185
16.
To calculate the EAC of the project, we first need the NPV of the project. Notice that we include the
NWC expenditure at the beginning of the project, and recover the NWC at the end of the project. The
NPV of the project is:
NPV = –$270,000 – 25,000 – $42,000(PVIFA
11%,5
) + $25,000/1.11
5
= –$435,391.39
Now we can find the EAC of the project. The EAC is:
EAC = –$435,391.39 / (PVIFA
11%,5
) = –$117,803.98
17.
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:
Both cases: aftertax salvage value = $40,000(1 – 0.35) = $26,000
To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I
is:
OCF = –$67,000(1 – 0.35) + 0.35($290,000/3) = –9,716.67
NPV = –$290,000 – $9,716.67(PVIFA
10%,3
) + ($26,000/1.10
3
) = –$294,629.73
EAC = –$294,629.73 / (PVIFA
10%,3
) = –$118,474.97
And the OCF and NPV for Techron II is:
OCF = –$35,000(1 – 0.35) + 0.35($510,000/5) = $12,950
NPV = –$510,000 + $12,950(PVIFA
10%,5
) + ($26,000/1.10
5
) = –$444,765.36
EAC = –$444,765.36 / (PVIFA
10%,5
) = –$117,327.98
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.
18.
To find the bid price, we need to calculate all other cash flows for the project, and then solve for the bid
price. The aftertax salvage value of the equipment is:
Aftertax salvage value = $70,000(1 – 0.35) = $45,500
Now we can solve for the necessary OCF that will give the project a zero NPV. The equation for the
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This document was uploaded on 10/31/2011 for the course FIN 3403 at University of Florida.
 Spring '06
 Tapley
 Finance

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