A replacement decision must be made for one of the copy machines at the Speedy C

Question

A replacement decision must be made for one of the copy machines at the Speedy Copy Service. After the initial screening of alternatives, two copy machines remain as contenders - a new model from Xerox and a reconstructed IBM. The relevant information on the two machines are as follows: Determine the (NPV) for the IBM copier for estimated volumes starting from 140,000 copies/year to 200,000 copies/year, in increments of 5,000 copies. From your answers to the above, determine which copier you would recommend to Speedy at an annual volume of 160.000, 180.000. & 200,000 copies Explain why the decision is different at different volumes. Speedy Copy expects to charge customers $0.05 per copy and sell 180.000 copies annually, however, they are uncertain about their service volume estimate. The $0.05 per copy they expects to charge customers and the maintenance & usage fees are not expected to change over the next five years. Speedy copy requires a minimum pre-tax rate of return of 16% on its investments. REQUIREMENTS 1. Determine the Net Present Value (NPV) for the Xerox copier for estimated volumes starting from 140,000 copies year to 200.000 copies year, in increments of 5,000 copies. This is a computer assignment that can be easily done using a standard spreadsheet software such as Excel. Estimated information for capital budgeting purposes is flexible and fluid and may change as managers have access to additional information. If the above capital budgeting problem was computed manually, and a change was made in a key number, the entire problem would have to be recomputed. This would be a redundant and time-consuming exercise. Instead, if a spreadsheet template, employing simple formulas, was constructed, a change could be made in a matter of seconds and the answers would be recomputed automatically. This assignment will have two parts, the fust comprising of the data-entry section, where you will enter the above data. The second part will be the capital budgeting template, which will ONLY contain formulas that are linked to the data-entry section. I recommend you test your template upon completion, i.e. change a key number in the data-entry section and see if the numbers in the template recompute correctly.

Explanation / Answer

Solution:

1) Calculation of NPV for Xerox copier for estimated volumes starting from 140,000 to 200,000 copies/year:

2) Calculation of NPV for IBM copier for estimated volumes starting from 140,000 to 200,000 copies/year:

3) Recommendation to Speedy at an annual volume of 160,000, 180,000, 200,000 copies:

Prefer Xerox copier at 160,000 volumes and IBM copier at 180,000 & 200,000 volumes.

4) Decision is different at different volumes:

Decision is different at different volumes due to changes in the per copy cost to the Xerox copier and there is no change in the per copy cost to the IBM copier.

No. of Copies 140,000 145,000 150,000 155,000 160,000 165,000 170,000 175,000 180,000 185,000 190,000 195,000 200,000 Revenue (0.05 per copy) 7,000 7,250 7,500 7,750 8,000 8,250 8,500 8,750 9,000 9,250 9,500 9,750 10,000 Less Cost (2,300 + 0.01 per copy) 3,700 3,750 3,800 3,850 3,900 3,950 4,000 4,050 4,100 4,150 4,200 4,250 4,300 Profit before tax 3,300 3,500 3,700 3,900 4,100 4,300 4,500 4,700 4,900 5,100 5,300 5,500 5,700

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