The Lansing Community College registrars office is consideri

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.

Solution

Alterntaive-1 Keep Canon Copiers: Annual operating cost: Operators wages (50*38*7.80*4) -59280 Annual repair cost (1440*4) -5760 Annual Supplies (1440*4) -5760 Annual Operating cost: -70800 Annuity factor for 5 yrs at 12% 3.6048 Present value of Canon -255220 Alternative-2 Purchase of Kodak Annual Operating cost: Operators wages (50*38*2*7.80) -29640 Repair contract -960 Supplies -3120 Annual operating cost -33720 Present value of cost -121554 (33720*3.6048) Add: Net Investment -111000 (113000-2000) Less: Present value of salvage 1418.5 (2500*0.5674) Net present value of Kodak -231135