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 $700; their resale value in 5 years will be zero. The Canon machines require 4 operators; they are paid $7.60 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 $1,200 for each machine. Supplies cost $960 a year for each machine.

The total cost of the new Kodak equipment will be $110,000. The equipment will have a life of 5 years and a total disposal value at that time of $2,300. 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 $960 per year. Total cost for all supplies will be $3,000 per year.

Required
Assuming a discount rate of 10%, 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

Canon copiers

Annual operator payroll (7.60 x 40 x 4 x 51)	(62016)
annual repair costs	(1200)
annual supplies	(960)
total annual costs	(64176)

total annual costs	(64176)
PVIFA factor (10%, 5 years)	3.79079
NPV	$(243278)

Kodak copiers

Annual operator payroll (7.60 x 40 x 3x 51)	(46512)
annual repair costs	(960)
annual supplies	(3000)
total annual costs	(50472)

Initial cost (110000-(700*5))	(106500)
PV of Total annual costs (50472*PVIFA10%, 5years)	(191328)
PV of salvage value (2300*PVF10%, 5years)	1428
NPV	$(296400)

As Canon copiers have less NPV of costs, the company should favor keeping the Canon copiers.

Difference = 296400 -243278 = $53122