Chapter 16

A replacement decision must be made for one of the copy machines at the Speedy Copy Service. After the initial screening of alternatives, two copy machines remain as contenders - a new model from Xerox and a reconstructed IBM. The relevant information on the two machines are as follows:

	Xerox	IBM
Installed Price	$14,500	$15,500
Estimated costs	$2,300 plus $0.01/copy	$4,050
Estimated salvage value	$1,500	$2,500
Estimated useful life	5 years	5 years

Speedy Copy expects to charge customers $0.05 per copy and sell 180,000 copies annually, however, they areuncertain about their service volume estimate. The $0.05 per copy they expects to charge customers and the maintenance & usage fees are not expected to change over the next five years. Speedy copy requires a minimum pre-tax rate of return of 16% on its investments.

REQUIREMENTS

Determine the Net Present Value (NPV) for the Xerox copier for estimated volumes starting from 140,000 copies/year to 200,000 copies/year, in increments of 5,000 copies.

Determine the (NPV) for the IBM copier for estimated volumes starting from 140,000 copies/year to 200,000 copies/year, in increments of 5,000 copies.

From your answers to the above, determine which copier you would recommend to Speedy at an annual volume of 160,000, 180,000, & 200,000 copies

Explain why the decision is different at different volumes.