Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started