Question

An office uses 1,000 photocopies per working day and there are 200 working days per year. Brand A copier costs $3,000 and will produce a total of one million copies before it wears out. Brand B’s copier costs $5,000 and will produce 2 million copies over its life. Maintenance and materials cost 3 cents pr copy with either machine, and neither machine will have any salvage value. The required return is 10 percent per year. Which machine should the company acquire?

Please dont do on excel.

Answer 1

Since the maintenance and material cost is same under both the alternatives, this cost is not relevant for the decision

Requirement per year = 1000*200 = 200,000

Hence, copier A will be useful till 1,000,000/200,000 = 5 years

and copier B till 10 years

Hence, the company will have to buy another copier after 5 years, if it goes with copier A

Present value of cost of copier A = 3,000 + 3,000*PVF(10%, 5 years)

= 3,000 + 3,000*0.62092

= $4,862.76

Present value of copier B = 5,000

hence. the company should choose Copier A, since the present value of cost is lower