Bill decided that he would ask for that new copy machine he had been researching. It had a purchase price of $250,000, he thought the maintenance costs would total $5,000 a year, and that the copier could reasonably be expected to last seven years. He estimated the salvage value at the end of seven years to be $25,000.

Better still, it was quicker, programmable and should eliminate 80% of the departments annual overtime labor costs of $70,000.

Student Questions:

1. Using the payback period method, determine if replacing the equipment is a good investment.
2. Using the Net Present Value (NPV) method, determine if replacing the equipment is a good investment. Assume the cost of capital is 10%.
3. Use the Internal Rate of Return to determine if replacing the equipment is a good investment. Why or why not?
4. What is the profitability index of this capital budgeting decision?