Bill Wheeler, Manager of Technical Publications (Tech Pubs), stood looking at his departments primary copier that had broken down yet again. He knew that he would have to ask his employees to work significant overtime once the copier was repaired if he was to meet his schedule. The first aircraft of the new fleet was almost ready for delivery and it could not depart without a full set of operator and maintenance manuals. 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.

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?