Southampton University is considering replacing some Xerox copiers with faster copiers purchased from Cannon. The administration is very concerned about the rising costs of operations during the last decade.

To convert to Cannon, two operators would have to be retrained. Required training and remodeling would cost £4,000. South Eastern’s three Xerox machines were purchased for £10,000 each, 5 years ago. Their expected life was 10 years. Their resale value now is £1,000 each and will be zero in 5 more years. The total cost of the new Cannon equipment will be £50,000; it will have zero disposal value in 5 years. The three Xerox operators are paid £8 an hour each. They usually work a 40-hour week.

Machine breakdowns occur monthly on each machine, resulting in repair costs of £50 per month and overtime of 4 hours, at time-and-one-half, per machine per month, to complete the normal monthly workload. Toner, supplies, and so on, cost £100 a month for each Xerox copier.

The Cannon system will require only two regular operators, on a regular work week of 40 hours each, to do the same work. Rates are £10 an hour and no overtime are expected. Toner, supplies, and so on will cost a total of £3,300 annually. Maintenance and repairs are fully serviced by Cannon for £1,050 annually. (Assume a 52-week year.)

1. Using DCF techniques, compute the PV of all relevant cash flows, under both alternatives, for the 5-year period discounted at 12 per cent. As a nonprofit university, Southampton does not pay income taxes.

2. Should Southampton 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?