Q1.

Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $450,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value at that time. Operating revenues from the facility are expected to be $365,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 4 percent. Production costs at the end of the first year will be $210,000, in nominal terms, and they are expected to increase at 5 percent per year. The real discount rate is 7 percent. The corporate tax rate is 21 percent.

Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Q2.

You are evaluating two different silicon wafer milling machines. The Techron I cost $270,000, has a 3-year life, and has pretax operating costs of $73,000 per year. The Techron II costs $470,000, has a 5-year life, and has pretax operating costs of $46,000 per year. For both milling machines, use straight-line depreciation to zero over the projects life and assume a salvage value of $50,000. If your tax rate is 24 percent and your discount rate is 10 percent, compute the EAC for both machines. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Which machine do you prefer?

• Techron I
• Techron II