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 $900; 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 38 hours a week and 51 weeks a year. The machines break down periodically, resulting in annual repair costs of $960 for each machine. Supplies cost $1,200 a year for each machine. The total cost of the new Kodak equipment will be $111,000. The equipment will have a life of 5 years and a total disposal value at that time of $1,900. 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 $1,020 per year. Total cost for all supplies will be $3,480 per year. Required: 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.

Answer 1

All the cash outflows are taken as positive and cash inflows as negative.

Total Net Present Value if Kodak Printer is purchased:

Total Purchase Cost = 111,000

Cost of Machine Breakdown contract per year = 1,020

Supplies Cost per year = 3,480

Operator Cost per year = 8.4*38*51*2 = 32,558

If Kodak copier is purchased, then there will be an inflow of the resale value of old canon copier amounting to 900 which will be used as an negative amount in calculation of Net Present Value. Also, there will be a disposable value of 1,900 of the New Kodak Copier which will be sold after 5 years. So the NPV will be calculated as follows:

Cashflows	Present Value Factor @ 14%	Present Value
(900)	1	(900)
111,000	1	111,000
37,058	0.877192982	32,507
37,058	0.769467528	28,515
37,058	0.674971516	25,013
37,058	0.592080277	21,942
37,058	0.519368664	19,247
(1,900)	0.519368664	(987)
Net Present Value		236,338

Calculation of Net Present Value of Canon Copier:

Operato Cost per year = 8.4*38*41*4 = 65,117

Repair cost per year = 960*4 = 3,840

Supplies cost per year = 1,200*4 = 4,800

Total Cashflow per year = 65,117 + 3,840 + 4,800 = 73,757

Calculation of Net Present Value:

Cashflow	Present Value Factor @ 14%	Present Value
73,757	0.877193	64,699
73,757	0.7694675	56,753
73,757	0.6749715	49,784
73,757	0.5920803	43,670
73,757	0.5193687	38,307
Net Present Value		253,213

Difference between Net Present Value = 236,338 - 253,213 = -16,875

So, purchasing a new Kodak Copier will be a better option then using the old copier as the NPV of operating new copier is less than that of the old one.