Question

The Lansing Community College registrar's office is considering replacing some Canon copiers with faster copiers purchased from Kodak. The office's 4 Canon machines are expected to last 5 more years. They can each be sold immediately for $1,300; their resale value in 5 years will be zero. The Canon machines require 4 operators; they are paid $8.10 an hour each and work 38 hours a week and 50 weeks a year. The machines break down periodically, resulting in annual repair costs of $1,140 for each machine. Supplies cost $1,440 a year for each machine. The total cost of the new Kodak equipment will be $113,000. The equipment will have a life of 5 years and a total disposal value at that time of $1,900. The Kodak system will require only 2 regular operators. Kodak has offered the college a maintenance contract that covers all machine breakdowns; the cost of the contract is $1,080 per year. Total cost for all supplies will be $3,240 per year. Required Assuming a discount rate of 10%, compute the difference between the net present value if the registrar's office keeps the Canon copiers and the net present value if it buys the Kodak copiers. [Note: If your results favor keeping the Canon copiers, enter your net present value difference as a positive number; if your results favor buying the Kodak copiers, enter your net present value difference as a negative number.]

Answer 1

Solution:

Computation of Difference in NPV - Keeping Canon copier and buying Kodak Copier
Particulars	Period	Amount	PV Factor	Present Value
Keeping Cannon Copier (A):
Current sale value	0	$5,200.00	1	$5,200.00
Annual Operator cost (4*38*50*$8.10)	1-5	$61,560.00	3.79079	$233,360.83
Annual repair cost	1-5	$4,560.00	3.79079	$17,285.99
Supplies Cost	1-5	$5,760.00	3.79079	$21,834.93
Present value of cash outflows (A)				$277,681.75
Buying Kodak Copier (B):
Cost of Kodak Equipment	0	$113,000.00	1.00000	$113,000.00
Annual Operator cost (2*38*50*$8.10)	1-5	$30,780.00	3.79079	$116,680.42
Annual maintenance cost	1-5	$1,080.00	3.79079	$4,094.05
Supplies Cost	1-5	$3,240.00	3.79079	$12,282.15
Salvage value of new machine	5	-$1,900.00	0.62092	-$1,179.75
Present value of cash Outflows (B)				$244,876.87
NPV (B-A)				-$32,804.89