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 5 Canon machines are expected to last 5 more years. They can each be sold immediately for $1,400; their resale value in 5 years will be zero. The total cost of the new Kodak equipment will be $110,000; the equipment will have a life of 5 years and a total disposal value at that time of $1,500.

The 5 Canon operators are paid $8.30 an hour each. They work a 40-hour week and 51 weeks a year. The machines break down periodically, resulting in annual repair costs of $1,080 for each machine. Supplies cost $1,440 a year for each machine.

The Kodak system will require only 3 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 $1,140 per year. Total cost for all supplies will be $3,600 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.]

Explanation / Answer

For Canon.

Yearly cost = (1080 + 1200)*4 + wage to operators = 2280*4 + 4*40*51*8.4 = $ 77,664

so NPV = annuity with annual investment of 77,664 at 12 % pa for 5 years

so NPV = - $ 279961.3390

i.e. the present value of all the cost will be $ 279961.3390

for kodak .

Yearly cost = 780 + 3360 + 2*40*51*8.4 = 38,412 per year

intial investment = $ 113000 - amount from sale of canon = 113000 - 1200*4 = 108,200

disposal value = $ 1900

so NPV = -108,200 + 1900 / (1.12)^5 - annuity with annual investment of 38,412 at 12 % pa for 5 years

= -108,200 + 1,078.111 - 138466.6635 = - $ 245,588.5525

i.e. the present value of all the cost will be $ 245,588.5525

so the kodaks will require a heavier cost..

you should enter = 245,588.5525 - 279961.3390 = -34,372.7865

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