The company paid 400000 for the pump Recently VacuTech with a new pump that

The company paid 400000 for the pump recently

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sealing in only six hours. The company paid $400,000 for the pump. Recently, VacuTech with a new pump that would reduce the evacuation tiem to two hour the purchase of this new pump, and has asked Doreen Harris, the company c replacting it with the new model. Doreen has gathered the following informatio and debugging it will cost $12,000. The pump would be assigned to the three- Accelerated Cost Recovery System (MACRS) and is expected to have an $80 as follows: Year 1 33% Year 2 45% Year 3 15% Year 4 7% The current pump is being depreciated under MACRS and will be fully depreci in service. If the company purchases the new pump, it will sell the current pum At the current rate of production, the new pump's greater efficiency will result i VacuTech is able to sell all testing equipment that it can produce. Because of t all additional units would be reduced by $150 per unit (in addition to the $125, On June 1, 2012 , VacuTech bought the latest in electronic high-speed vacuum The new pump could be installed and placed in service on January 1, 2016 . T of four years. Depreciation on the equipment would be recognized starting in expected to increase by 30 units in 2016 , 50 units in both 2017 and 2018 , and VacuTech is subject to a 40% income tax rate. For evaluating capital investme annual cash flows occur at the end of the year and uses a 15 percent after-tax
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Information Existing Pump: Original Cost $400,000 Time (hours) per unit produced 6 hours New pump’s cost $608,000 Installing, testing, and debugging $12,000 Salvage value, end of 4 years $80,000 MACRS rates (rounded) would be as follows: Year 1 33% Year 2 45% Year 3 15% Year 4 7% Current salvage value of old pump $50,000 Selling price per unit $3,500 Current full-cost per unit produced $2,450 Annual pretax cash savings $125,000 Output is expected to increase by: 30 50 70 Time (hours) per unit produced 2 hours Reduction in manufacturing costs $150 (per unit, in ad Income tax rate 40% After-tax discount rate (WACC) 15% Requirements 1. Determine whether VacuTech should purchase the new pump by calculating 2. Describe the factors, other than the net present value, that VacuTech should pump replacement decision. (CMA Adapted) Solution units in 2013 units in both 2014 and 2015 units in 2016 January 1, 2016 , of the estimated after-tax cash flows that would result from
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1. Per unit pre-tax cash for each additional unit sold: Sales price per unit Current variable (cash-based) manufacturing cost Cash-based cost savings per unit, with the new machine Pre-tax cash flow per unit for the additional units Cash flow analysis: PV 1-Jan-16 Purchase cost of new asset ($608,000) ($608,000) Installation cost of new asset ($12,000) ($12,000) After-tax proceeds, sale of old $30,000 $30,000 Pre-tax cash flow per unit (see above) Additional units sold (given) Pre-tax cash flow from sale of additional units Efficiency savings, pretax Total increase in pre-tax cash flow Less: Income taxes (@40%) Increase in after-tax cash flow before depreciation After-tax proceeds from disposal Incremental tax savings from depreciation (new vs. old) After-tax cash inflows $529,994 Net Present Value (NPV) = ($60,006) factors from the text were used to analyze the data, your result (because o result reported here in this spreadsheet.
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