Equipment replacement, income taxes. (CMA, adapted) Microvac is considering the pur- chase of a new, more efficient pump on January 1, 2012 (four years later). The new pump costs $807,500. The pump qualifies for a capital cost allowance rate of 25%, declining balance. The new pump is expected to have a terminal disposal price of $96,000 at the end of four years. At current rates of production, the new pump's greater efficiency will result in annual cash savings of $175,000. On January 1, 2008, Microvac bought a vacuum pump for $480,000. This pump will be fully amortized for accounting purposes by December 31, 2011, but it can still be used for another four years. It has a current disposal price of $72,600. If it is used for another four years, the pump's residual disposal price will be zero. Microvac is able to sell all the testing instruments for microcircuits it produces. These instruments sell for $4,480 each. Microvac incurs cash operating costs of $3,220 to manufac- ture these instruments. Because of the increased speed of the new pump, output is expected to increase by 30 units in 2012, 50 units in 2013 and 2014, and 70 units in 2015. Over and above the annual cash savings at current production levels, Microvac's cash manufacturing costs will decrease by $180 per unit on all additional units produced. Microvac is subject to a 40% tax rate. Microvac's after-tax required rate of return is 16%. REQUIRED 1. Determine whether Microvac should purchase the new pump by calculating the net present value at January 1, 2012, of the estimated after-tax cash flows that would result from the acquisition. 2. Describe the nonfinancial and qualitative factors that Microvac should consider before making the pump replacement decision.

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