Question

This is a problem with mutually exclusive projects. You only have to do the net present value method, so you can evaluate the projects separately, or you can combine them. But if you evaluate them separately, the answer you submit must be the difference in the two net present values (see the directions for the correct sign to use). As you determine the cash flows, make sure that you use the correct project life and that you treat the current disposal value of the current machines properly. And finally, read everything very carefully; some costs are expressed per machine, some for all machines, some monthly, and some annually.
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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 $1,500; their resale value in 5 years will be zero. The Canon machines require 4 operators; they are paid $8.20 an hour each and work 40 hours a week and 51 weeks a year. The machines break down periodically, resulting in annual repair costs of $1,260 for each machine. Supplies cost $1,200 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 $1,700. 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 $1,080 per year. Total cost for all supplies will be $3,360 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.]

Answer 1

	OPTION A	keeping the Canon copiers
		Annual operators costs	$          66,912	(4*$8.2*40*51)
		Annual repair costs	$            5,040	(1260*4)
		Annual Supplies expenses	$            4,800	(1200*4)
		Total annual Costs	$    76,752.00
		Number of years	5
		Present Value of Costs	$276,673.78	(Using PV function of excel with Rate=12%,Nper=5, Pmt=76752)
		Net Present Value of OPTION A	$276,673.78
	OPTION B	Buying the Kodak copiers
		Cost of machine	$113,000
		Cash received from Selling old machine	$6,000	(1500*4)
		Initial Investment	$107,000
		Less: Present value of disposal amount	$      1,055.57	(1700/(1.1^5))
		Net investment costs at year 0	$105,944
		Annual Costs:
		Annual operators costs	$          50,184	(3*$8.2*40*51)
		Annual repair costs	$1,080
		Annual Supplies expenses	$3,360
		Total annual costs	$          54,624
		Number of years	5
		Present Value of Annual Costs	$196,907.30	(Using PV function of excel with Rate=12%,Nper=5, Pmt=-54624)
		Net Present Value of OPTION B	$302,851.73	(196907.30+105944)
		Net Present value difference	$26,177.95
		Results favor keeping the Canon copiers