Please be as detailed as possible, I am having a really hard time with this problem. VacuTech is a high-technology company that manufactures sophisticated instruments for testing microcircuits. Each
instrument sells for $3,500 and costs $2,450 to manufacture. An essential component of the company's manufacturing
process is a sealed vacuum chamber where the interior approaches a pure vacuum. The technology of the vacuum pumps
that the firm uses to prepare its chamber for sealing has been changing rapidly.
On June 1, 2012, VacuTech bought the latest in electronic high-speed vacuum pumps that can evacuate a chamber for
sealing in only six hours. The company paid $400,000 for the pump. Recently, the pump's manufacturer approached
VacuTech with a new pump that would reduce the evacuation tiem to two hours. VacuTech's management is considering
the purchase of this new pump, and has asked Doreen Harris, the company controller, to evaluate the financial impact of
replacting it with the new model. Doreen has gathered the following information prior to preparing her analysis:
The new pump could be installed and placed in service on January 1, 2016. The pumps cost is $608,000; installing, testing, and
and debugging it will cost $12,000. The pump would be assigned to the three-year class for depreciation under the Modified
Accelerated Cost Recovery System (MACRS) and is expected to have an $80,000 salvage value when it is sold at the end
of four years. Depreciation on the equipment would be recognized starting in 2016, and MACRS rates (rounded) would be
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 depreciated by the time the new pump is placed
in service. If the company purchases the new pump, it will sell the current pump for $50,000.
At the current rate of production, the new pump's greater efficiency will result in annual pre-tax cash savings of $125,000.
VacuTech is able to sell all testing equipment that it can produce. Because of the new pump's increased speed, output is
expected to increase by 30 units in 2016, 50 units in both 2017 and 2018, and 70 units in 2019. Manufacturing costs for
all additional units would be reduced by $150 per unit (in addition to the $125,000 savings noted above).
VacuTech is subject to a 40% income tax rate. For evaluating capital investment proposals, management assumes that
annual cash flows occur at the end of the year and uses a 15 percent after-tax discount rate.
Information
Existing Pump:
Original Cost		$400,000
Time (hours) per unit produced		6	hours
New pump