Accounting Question - Capital Budgeting The Community College registrar\'s offic

Question

Accounting Question - Capital Budgeting

The 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 5 more years. They can each be sold immediately for $500; their resale value in 5 years will be zero. The Canon machines require 4 operators; they are paid $8.40 an hour each and work 39 hours a week and 51 weeks a year. The machines break down periodically, resulting in annual repair costs of $1,140 for each machine. Supplies cost $1,080 a year for each machine.

The total cost of the new Kodak equipment will be $114,000. The equipment will have a life of 5 years and a total disposal value at that time of $2,900. The Kodak system will require only 3 regular operators. 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.

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.

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

Solution:

Computation of Difference in NPV - Keeping Canon copier and buying Kodak Copier Particulars Period Amount PV Factor Present Value Keeping Cannon Copier (A): Current sale value 0 $2,000 1 $2,000 Annual Operator cost (4*39*51*$8.40) 1-5 $66,830 3.43308 $229,434 Annual repair cost 1-5 $4,560 3.43308 $15,655 Supplies Cost 1-5 $4,320 3.43308 $14,831 Present value of cash outflows (A) $261,920 Buying Kodak Copier (B): Cost of Kodak Equipment 0 $114,000 1 $114,000 Annual Operator cost (3*39*51*$8.40) 1-5 $50,123 3.43308 $172,076 Annual maintenance cost 1-5 $1,020 3.43308 $3,502 Supplies Cost 1-5 $3,120 3.43308 $10,711 Salvage value of new machine 5 -$2,900 0.51937 -$1,506 Present value of cash Outflows (B) $298,782 NPV (B-A) $36,862

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