The Lansing Community College registrar\'s office is considering replacing some

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

Annual cash used if the Canon copiers are kept
7.90 x 40 x 5 x 52 = -$82,160 operator payroll
-$1,020 annual repair costs
-$1,080 annual supplies
= -$102,792 total annual costs
NPV = ($389,662.55)

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