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 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 $7.80 an hour each and work 38 hours a week and 50 weeks a year. The machines break down periodically, resulting in annual repair costs of $1,440 for each machine. Supplies cost $1,440 a year for each machine.

The total cost of the new Kodak equipment will be $113,000. The equipment will have a life of 5 years and a total disposal value at that time of $2,500. The Kodak system will require only 2 regular operators.  Kodak has offered the college a maintenance contract that covers all machine breakdowns; the cost of the contract is $960 per year. Total cost for all supplies will be $3,120 per year.

Required
Assuming a discount rate of 12%, 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

"Lansing Community College"

I. Computation of NPV

a) If Existing Canon Copiers are used: (Amount in $)

Operator Salary

(7.8x38x50x4)

Annual Repair Cost

(1440x4)

Supplies Cost

(1440x4)

b. If New Kodak Copier is purchased and Canon Copiers are disposed off: (Amount in $)

Sales Value of Canon Copier

(500x4)

Operator Cost

(2x7.8x38x50)

II. Computation of Difference in NPV of two Options;

III. DECISION: SINCE COST IS LESS IN CASE IF KODAK COPIER IS PURCHASED, OPTION OF BUYING KODAK COPIER SHOULD BE ADOPTED.

Sr.No. Particulars Period Factor @ 12% Amount Present Value 1

Operator Salary

(7.8x38x50x4)

1-5 3.605 59280 213704.40 2

Annual Repair Cost

(1440x4)

1-5 3.605 5760 20764.80 3.

Supplies Cost

(1440x4)

1-5 3.605 5760 20764.80 4. Disposal Value 5 0.567 0 0 NET PRESENT VALUE 255234

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