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 $500; their resale value in 5 years will be zero. The Canon machines require 4 operators; they are paid $7.80 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 $1,440 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 $2,500. 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 $960 per year. Total cost for all supplies will be $3,120 per year.

Required
Assuming a discount rate of 12%, 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

Alterntaive-1 Keep Canon Copiers:
Annual operating cost:
Operators wages (50*38*7.80*4)				-59280
Annual repair cost (1440*4)				-5760
Annual Supplies (1440*4)				-5760
Annual Operating cost:				-70800
Annuity factor for 5 yrs at 12%				3.6048
Present value of Canon				-255220
Alternative-2 Purchase of Kodak
Annual Operating cost:
Operators wages (50*38*2*7.80)				-29640
Repair contract				-960
Supplies				-3120
Annual operating cost				-33720
Present value of cost				-121554
(33720*3.6048)
Add: Net Investment				-111000
(113000-2000)
Less: Present value of salvage				1418.5
(2500*0.5674)
Net present value of Kodak				-231135