EAB / EAC Problems Hazel Company is trying to reduce its cost structure in an effort to boost profits. It is looking at automating parts of its production process. It is evaluating two different pieces of equipment to acomplish the cost reductions. WACC 9% Equip A Year 1 Cash Flows Year 2 Today Year 3 Cost of equipment Shipping & handling Start-up expenses Total Investment $ $ $ (100,000) (5,000) (15,000) (120,000) $ Labor savings (after tax) Salvage value (after tax) Total Savings $ $ 40,000 $ $ 47,000 $ $ 55,000 15,000 70,000 40,000 $ 47,000 $ NPV EAB Equip B Year 1 Cash Flows Year 2 WACC 9% Today Year 3 Year 4 Cost of equipment Shipping & handling Start-up expenses Total Investment $ $ $ (120,000) (5,000) (5,000) (130,000) $ 40,000 $ Labor savings (after tax) Salvage value (after tax) Total Savings $ $ 30,000 $ $ 50,000 $ $ $ 50,000 10,000 60,000 $ 30,000 $ 40,000 $ 50,000 $ NPV EAB 1) Explain when and why you should use EAB. EAB / EAC Problems Hazel Company is trying to reduce its cost structure in an effort to boost profits. It is looking at automating parts of its production process. It is evaluating two different pieces of equipment to acomplish the cost reductions. WACC 9% Equip A Year 1 Cash Flows Year 2 Today Year 3 Cost of equipment Shipping & handling Start-up expenses Total Investment $ $ $ (100,000) (5,000) (15,000) (120,000) $ Labor savings (after tax) Salvage value (after tax) Total Savings $ $ 40,000 $ $ 47,000 $ $ 55,000 15,000 70,000 40,000 $ 47,000 $ NPV EAB Equip B Year 1 Cash Flows Year 2 WACC 9% Today Year 3 Year 4 Cost of equipment Shipping & handling Start-up expenses Total Investment $ $ $ (120,000) (5,000) (5,000) (130,000) $ 40,000 $ Labor savings (after tax) Salvage value (after tax) Total Savings $ $ 30,000 $ $ 50,000 $ $ $ 50,000 10,000 60,000 $ 30,000 $ 40,000 $ 50,000 $ NPV EAB 1) Explain when and why you should use EAB