1.3

Laurentian University is considering replacing its Xerox copiers with Sharp copiers. A detailed analysis was completed on the functional requirements of copiers and the Sharp product was superior in many categories including speed, ease of use, quality of output, paper capacity, and a number of other functional areas. Cost is also an important factor in the copier decision. The administration is very concerned about the rising costs of operations over the past five years and is looking for cost savings in its acquisition of information technology products including copiers.

Costs for the Xerox copiers (current product)

Laurentian's three Xerox copiers were purchased for $15,000 each, five years ago. Their expected life was 10 years. Their resale value is now $1,000 each; and will be $0 in five years.

There are three Xerox operators and they earn $16 an hour each. They typically work a 40-hour week. Machine breakdowns occur monthly on each machine, resulting in repair costs of $50 per month and overtime of four hours is paid at time-and one-half, per machine, per month. Toner, supplies, and other incidentals cost $100 per month for each of the three Xerox machines.

Costs for the Sharp copiers (proposed product)

In order to convert to the Sharp product line, two operators would have to be trained. Required training for the two operators and partial remodeling of the premises would cost $2,000.

The total cost (purchase price) of the three new Sharp copiers is $56,000 and there will be $0 disposal value in five years. The Sharp copiers system will require only two regular operators, on a regular workweek of 40 hours each to do the same work. The operators are paid $22 per hour, and no overtime is expected. Toner, supplies, and other incidentals will cost $3,300 annually. Maintenance and repairs for all three copiers are fully service by Sharp for $1,050 annually. (Assume a 52-week year).

a. Using discounted cash flow techniques, compute the present value of all relevant cash flows, under both alternatives (Xerox vs Sharp), for the five year period. Use a discount rate of 12%. Ignore income taxes as Laurentian is a not-for-profit organization.

b. Should Laurentian keep the Xerox copiers or replace them with the Sharp offering if the decision is based solely on cost?

What other considerations, other than cost, might affect the decision?