You are evaluating two different silicon wafer milling machines. The Techron I costs $200,000, has a three-year life, and has pretax operating costs of $36,000 per year. The Techron II costs $350,000, has a six-year life, and has pretax operating costs of $14,000 per year. Both milling machines are in Class 8 (CCA rate of 20 percent per year) and have a salvage value of $55,000. If your tax rate is 39 percent and your discount rate is 18 percent, compute the EAC for both machines

PV(Costs) = -$200,000 - $21,960 × PVIFA(18%, 3) + $55,000

(1 + 0.18)3
+ $31,050.38 = $183,221.96



This is my solution for my homework so far but I do not understand how I am able to get PVIFA(18%, 3) .

The formula for the PV factor for any given discount rate and number of years is

PVIFA = \frac{1-(1+r)^{-n}}{r}

Thus for a 3-year annuity at an 18% discount rate it comes to 2.17427293.

The key to this problem, though, is making sure you've determined all the relevant cash flows for each machine. You'll need to include in your cash flow schedule the after-tax operating costs, the tax savings of the depreciation, and the after-tax salvage value.

Check back in if you're still wrestling with it, and let's see your cash flow schedules for the two machines.

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