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 $7.70 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 $1,380 for each machine. The cost of supplies for each machine will be $1,440 a year.

The total cost of the new Kodak equipment will be $120,000. 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 3 regular operators. Kodak has offered the college a maintenance contract that covers all machine breakdowns; the cost of the contract is $900 per year. The cost of supplies for all the machines combined will be $3,840 a 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.]

Answer 1

Computation of differential NPV to keep Canon copier
Particulars	Canon	Kodak	Additional Cost of Kodak
Step 1: Additional Initial Cost
Purchase Cost	$                  -	$      1,20,000
Sale of Canon		$          -2,000
Initial investment (A)	$                  -	$      1,18,000	$                           1,18,000
Life	5	5
Step 2: Additional Cash Flow
Labour Cost	$          58,520	$          43,890	$                              -14,630
Annual Repair Cost	$            5,520	$               900	$                                -4,620
Supplies	$            5,760	$            3,840	$                                -1,920
Total Annual Cash Outflow	$         69,800	$         48,630	$                             -21,170
Discount Rate			12%
PVF at 12% for 5 years			3.6048
Present Value of AdditionalCash Outflow (B)			$                        -76,313.62
Step 3: Salvage Value
Salvage Value	$                  -	$            2,500	$                                -2,500
PV at 12% on 5th year			0.5674
Present Value of Salvage ©			$                          -1,418.57
Total Additional Cost (A+B+C)			$                         40,267.82
Keeping the Canon copier is the best option

I hope this solution helps you. Kindly let me know if you require any further clarification.

Thank you! :)