Midwestern University is considering replacing some Xerox copiers with faster copiers purchased from Brother. The administration is very concerned about the rising costs of operations during the last decade.
To convert to Brother, two operators would have to be retrained. Required training and remodeling would cost $3,500. Midwestern’s three Xerox machines were purchased for $8,000 each, 5 years ago. Their expected life was 15 years. Their resale value now is $1,750 each and will be zero in 10 more years. The total cost of the new Brother equipment will be $60,000; it will have zero disposal value in 10 years.
The three Xerox operators are paid $12 an hour each. They usually work a 40-hour week. Machine breakdowns occur monthly on each machine, resulting in repair costs of $75 per month and overtime of 6 hours, at time-and-one-half, per machine per month, to complete the normal monthly workload. Toner, supplies, and so on, cost $50 a month for each Xerox copier.
The Brother system will require only two regular operators, on a regular work week of 40 hours each, to do the same work. Rates are $14 an hour, and no overtime is expected. Toner, supplies, and so on, will cost a total of $4,500 annually. Maintenance and repairs are fully serviced by Brother for $600 annually. (Assume a 52-week year.)
1. Using DCF techniques, compute the PV of all relevant cash flows, under both alternatives, for the 10-year period discounted at 14%. As a nonprofit university, Midwestern does not pay income taxes.
2. Should Midwestern keep the Xerox copiers or replace them if the decision is based solely on the given data?
3. What other considerations might affect the decision?

  • CreatedNovember 19, 2014
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