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1. 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 firms 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:

Information
Initial Cost	70,000
Operating Cost	20,000
Depreciation	50%/Year
Tax Rate	20%
MACRS Depreciation	Year	Year	Year
	0	1	2
MACRS Depreciation Rate		50%	50%
OCF:
Operating Cost
Tax Savings
Depreciation of Tax Shield
= OCF
CFFA:
OCF
NCS
CFFS
NPV
EAC	$47,716

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