Jalissa Inc. manufactures testing instruments for microcircuits. These instruments sell for $5,250 each. Jalissa Inc. incurs cash operating costs of $3,675 to manufacture these instruments. On January 1, 2016, Sanjoy Inc. bought a vacuum pump for $600,000. Sanjoy Inc. is considering the purchase of a new, more efficient pump on January 1, 2020 (4 years later). The new pump costs $930,000. The new pump is expected to have a terminal disposal price of $120,000 at the end of four years. At current rates of production, the new pump's greater efficiency will result in annual operating savings of $187,500. The old pump will be fully depreciated for accounting purposes by December 31, 2019, but it can still be used for another four years. It has a current disposal price of $75,000. If it is used for another four years, the pump's terminal disposal price will be zero. Jalissa Inc. can sell all the testing instruments it produces. Because of the increased speed of the new pump, output is expected to increase by 30 units in 2020, 50 units in 2021 and 2022, and 70 units in 2023. Over and above the annual cash savings at current production levels, Sanjoy's cash manufacturing costs will decrease by $225 per unit of all additional units produced. Sanjoy Inc. uses straight line depreciation on all assets, is subjected to a 25% tax rate and its cost of capital is12% Calculate the initial investment Initial Investment Details Total Amount Total Calculate the annual net cash flows Annual operating costs additional units Contribution margin per unit total contribution add: annual operating savings Less: Depreciation Total operating income less: taxes Net income add: depreciation Net cash flows 2020 2021 2022 2023 30 50 50 70 70 Calculate the terminal cash flows. Terminal cash flow $ Calculate the terminal cash flows. Terminal cash flow Calculate the NPV Calculating NPV Year 2020 2021 2022 2023 2023 Total cash inflows Less: initial investment NPV CashflowPVIF 0.8929 0.7972 0.7119 0.6355 0.6355 $ $ PV cash flow