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Fairfield Office Supplies Inc. has a regional chain of office supply stores in the Midwest. Fairfield is trying to compete with the large nationwide office

Fairfield Office Supplies Inc. has a regional chain of office supply stores in the Midwest. Fairfield is trying to compete with the large nationwide office supply companies. It is January of 2023 and Fairfield needs to make some capital budgeting decisions this year. They need to decide whether to replace their computerized inventory system or upgrade the old one, whether to purchase two stores from a sole proprietor or not, whether to keep, abandon or modernize one of the stores, which new copiers to purchases and a few other small projects. The company is under some pressure and has a strict capital budget of $10 million, so they need to be careful as to which projects they choose.

Book Value Balance Sheet for 12/31/22

(all values in millions)

Assets

Liabilities and Net Worth

Cash and short-term securities $1.5

Bonds, coupon =9.5%, paid $15.0

Annually (maturity = 20 years,

Current yield to maturity = 9.0%)

Accounts Receivable 3.0

Preferred stock (par value $4.5 4.5

Per share)

Inventories 6.0

Common Stock (par value $.5) 1.50

Plant and equipment 35

Additional paid in stockholders 6.00

Capital

Retained Earnings 18.5

Total $45.5

Total $45.5

Years

2022

2021

2020

2019

2018

Net Income

(in millions)

5.11

4.80

4.40

4.10

3.90

Purchase of copy machine

Fairfield is considering two alternative copy machines to purchase. Fairfield will need to purchase three machines for each of its thirty stores. Machine A has an expected life of 4 years, will cost $29,000, and will produce net cash flows of $12,700 per year. Machine B has an expected life of 8 years, will cost $36,500 and will produce net cash flows of $9500 per year. Fairfield plans to operate the machines for 8 years. Inflation is expected to be zero and depreciation is already taken into account in the cash flows. Which new machine should Fairfield purchase?

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