Mid term Problem examples

Mid term Problem examples - Mid term examples CHAPTER 8...

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Mid term examples CHAPTER 8 PROBLEM 10 EAC 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: Aftertax salvage value = $76,000(1 – 0.35) = $49,400 To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I are: OCF = –$85,000(1 – 0.35) + 0.35($450,000/3) = –$2,750 NPV = –$450,000 – $2,750(PVIFA 14%,3 ) + ($49,400/1.14 3 ) = –$423,040.90 EAC = –$423,040.90 / (PVIFA 14%,3 ) = –$182,217.03 And the OCF and NPV for Techron II are: OCF = –$91,000(1 – 0.35) + 0.35($580,000/5) = –$18,550 NPV = –$580,000 – $18,550(PVIFA 14%,5 ) + ($49,400/1.14 5 ) = –$618,026.84 EAC = –$618,026.84 / (PVIFA 14%,5 ) = –$180,021.05 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
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Mid term Problem examples - Mid term examples CHAPTER 8...

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