The Faculty of Business at Old Renowned University wishes to buy new personal computers for its 20 full-time faculty members. The university is a nonprofit institution and does not pay any taxes. The Faculty can buy 20 Ultra Fast PCs, each costing $2,500. It is estimated that the annual cost of each PC will be $150. The Ultra Fast PCs will be scheduled for replacement at the end of 5 years, at which time they can be resold for $4 50 each. As an alternative to the Ultra Fast brand, the Faculty can also buy the more moderately priced Medium Fast PC for $2,000 apiece with annual servicing cost of $300 each If the Faculty does decide on the Medium Fast PC, it will buy 2S units for all its full and part-time faculty members. The Medium Fast PCs are expected to be replaced at the end of 4 years with an estimated resale value of $250 each.
The Dean of the Faculty of Business has approached you to conduct an analysis and make a recommendation. You have been informed that the opportunity cost of funds to the Faculty for investments of this nature is 12%.
a. On the basis of your analysis, would you recommend buying the Ultra Fast or the Medium Fast brand?
b. Suppose now that the PCs will not be resold at the time of replacement but will instead be donated for free to an international charitable organization. Rework your analysis to see whether your recommendation will change on the basis of this new information.
c. The Dean has informed you that if a new, superior model, the Hyper 3MM, appears on the market in the near future, it will be the preferred choice for replacement purposes. In this case, the Faculty will replace all its existing PCs with the Hyper brand at the end of 4 years. Would you now recommend the Ultra Fast or the Medium Fast brand until the end of year 4?