Sanjoy Inc. manufactures testing instruments for microcircuits. These instruments sell for $4,200 each. Sanjoy Inc. incurs cash operating costs of $2,940 to manufacture these instruments. On January 1, 2006, Sanjoy Inc. bought a vacuum pump for $480,000. Sanjoy Inc. is considering the purchase of a new, more efficient pump on January 1, 2010 (4 years later). The new pump costs $744,000. 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 pumps greater efficiency will result in annual operating savings of $150,000.

The old pump will be fully depreciated for accounting purposes by December 31, 2009, but it can still be used for another four years. It has a current disposal price of $60,000. If it is used for another four years, the pumps terminal disposal price will be zero.

Sanjoy Inc.. is able to 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 2010, 50 units in 2011 and 2012, and 70 units in 2013. Over and above the annual cash savings at current production levels, Sanjoys cash manufacturing costs will decrease by $180 per unit of all additional units produced. Sanjoy Inc. uses straight line depreciation on all assets, is subjected to a 40% tax rate and its cost of capital is16%

Required

1. Using the NPV method determine whether Sanjoy Inc. should purchase the new pump.