The Lansing Community College registrar\'s office is considering replacing some
ID: 2373981 • Letter: T
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 6 more years. They can each be sold immediately for $700; their resale value in 6 years will be zero. The total cost of the new Kodak equipment will be $115,000; the equipment will have a life of 6 years and a total disposal value at that time of $2,900.
The 4 Canon operators are paid $8.50 an hour each. They work a 38-hour week and 52 weeks a year. The machines break down periodically, resulting in annual repair costs of $1,140 for each machine. Supplies cost $960 a year for each machine.
The Kodak system will require only 2 regular operators to do the same work. Kodak has offered the college a maintenance contract that covers all machine breakdowns; the cost of the contract is $1,020 per year. Total cost for all supplies will be $3,120 per year.
Required
Assuming a discount rate of 14%, 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.]
Explanation / Answer
Replacement Analysis %u2013 Cash Flow Approach
Old Cannon - Defender
Case: if the registrar's office keeps the Canon copiers
Operator Exp per year = 8.40*4*40*51 = 68544
Annual Repair cost = 4*1200 = 4800
Supplies 4*1080 = 4320
-------------------
Total exp pa = 77664
0------1-----2-----3------4-------5
77664 77664 77664 77664 77664
PW(12%)D = 77664*(P/A,12%,5) =77664*3.6048 = 279963
AEC(12%)D = PW(12%)D*(A/P,12%,5)=279963*0.2774 =77664
Challender : Kodak
Case: if it buys the Kodak copiers.
Operator Exp per year = 8.40*2*40*51 =34272
Annual Repair cost = 780
Supplies 3360
-------------------
Total exp pa = 38412
1200 1900
0------1-----2-----3------4-------5
113000 38412 38412 38412 38412 38412
PW(12%)C=111800+38412*(P/A,12%,5)-1900*(P/F,12%,5)
PW(12%)C =111800 + 38412*3.6048 - 1900*0.5674
ie PW(12%)C = 249190
AEC(12%)C = PW(12%)C*(A/P,12%,5) =249190*0.2774=69125
So DIfference bertwen NPV is 69125-77664 = -8539
So replace the Defender (Old Cannon) now.
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