Larry is a financial analyst at Sumimoto Silicon Berhad. He is currently evaluating two different...
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Finance
Larry is a financial analyst at Sumimoto Silicon Berhad. He is currently evaluating two
different milling machines for the silicon wafer. The Petron I cost RM430,000, has a three- year life, and has pretax operating costs of RM70,000 per year. The Petron II costs
RM540,000, has a five-year life, and has pretax operating costs of RM88,000 per year. For both milling machines, use straight-line depreciation to zero over the projects life and assume a salvage value of RM40,000. The corporate tax rate is 34% and the discount rate is 14%. i. Based on the above text, explain when equivalent annual cost analysis is used in comparing two or more projects. (2 marks) ii. Determine the equivalent annual cost (EAC) for both machines. (6 marks) iii. Based on your answer in (ii), explain which project Larry should prefer. Please provide justification for the answer.
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