Question

In: Finance

Can you please not solve this on excel. can you show clearly steps you took. Thanks...

Can you please not solve this on excel. can you show clearly steps you took. Thanks

An office uses 1,000 photocopies per working day and there are 200 working days per year. Brand A copier costs $3,000 and will produce a total of one million copies before it wears out. Brand B’s copier costs $5,000 and will produce 2 million copies over its life. Maintenance and materials cost 3 cents pr copy with either machine, and neither machine will have any salvage value. The required return is 10 percent per year. Which machine should the company acquire?

Solutions

Expert Solution

Total copy required per year = 1000 copies per day*200 working days
= 200,000
total copy cost per year = 200,000*0.03
= $6,000
Brand A copier
No, of copies (life time) = 1,000,000
No.of years it can be used = no.of copies(life time)/annualrequirement
= 1,000,000/200,000
= 5 years
PV of copy cost for 5 years = Copy cost * PVAF(10%,5years)
= $6000*PVAF(10%,5years)
= $6000*3.7908
= $22,744.80
Cost of purchase = $3,000
Total cost for 5years = purchase cost +PV of copy cost
= $3000+$22744.8
= $25,744
average annual cost = total cost /no.of years
= $25744/5
= $5,148.96
Brand B copier
No, of copies (life time) = 2,000,000
No.of years it can be used = no.of copies(life time)/annual requirement
= 2,000,000/200,000
= 10 years
PV of copy cost for 10 years = Copy cost * PVAF(10%,10years)
= $6000*PVAF(10%,10years)
= $6000*6.1446
= $36,867.60
Cost of purchase = $5,000
Total cost for 10 years = purchase cost +PV of copy cost
= $5000+$36,867.6
= $41,868
average annual cost = total cost /no.of years
= $41868/10
= $4,186.76
Decision-since average annual cost in Brand B's copier is less,we should purchase Brand B's copier
Note
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