Kaufman Chemical is evaluating the purchase of a new multi-stage centrifugal compressor for its wastewater treatment operation that costs $750 000 and requires $57 000 to install. This outlay would be partially offset by the sale of an existing compressor originally purchased five years ago for $490 000. It is being depreciated using a five-year recovery schedule under ACRS and can currently be sold for $150 000. The existing compressor’s maintenance costs are increasing and the new compressor could reduce operating costs before depreciation and taxes by $280 000 annually for the next five years. The new equipment will be depreciated under a five-year recovery schedule using ACRS. The firm has an 18% cost of capital and a 40% tax of ordinary and capital gain income.Evaluate whether Kaufman Chemical should replace its existing wastewater treatment equipment with the new compressor. (Do not consider the terminal value of the new compressor in your analysis.)
