- A forming die (Die A) which is used in the manufacture of your product has an acquisition cost of $70,000, a useful life of two years and an annual maintenance cost of $20,000. The die will be depreciated using MACRS with a rate of 50% per year. The die will be replaced every two years. The die has no salvage value. The firm’s Weighted Average Cost of Capital is 7 percent and that is considered an appropriate discount rate for this evaluation. Your firm has tax rate of 20%.
An alternative die (Die B) that is more expensive to acquire, costs less to maintain and that has a longer life has an EAC of $52,743.
What is the equivalent annual cost, or EAC of using die A? $47,716
.
Which die would you select (A or B)? Die A since it has the lowest EAC
Please use the template below to develop your answer:
EAC Die A:
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Information |
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Initial Cost |
70,000 |
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Operating Cost |
20,000 |
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Depreciation |
50%/Year |
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Tax Rate |
20% |
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MACRS Depreciation |
Year |
Year |
Year |
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0 |
1 |
2 |
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MACRS Depreciation Rate |
50% |
50% |
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OCF: |
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Operating Cost |
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Tax Savings |
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Depreciation of Tax Shield |
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= OCF |
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CFFA: |
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OCF |
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NCS |
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CFFS |
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NPV |
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EAC |
$47,716 |
