Question
Portland State University is considering replacing some Xerox copiers with faster copiers purchased from Brother. The administration is very concerned about the rising costs of
Portland State University is considering replacing some Xerox copiers with faster copiers purchased from Brother. The administration is very concerned about the rising costs of operations during the last decade.
To convert to Brother, two operators would have to be retrained. Required training and remodeling would cost $6,500. Portland State's three Xerox machines were purchased for $8,000 each, 3 years ago. Their expected life was 8 years. Their resale value now is $1,750 each and will be zero in 5 more years. The total cost of the new Brother equipment will be $40,000; it will have zero disposal value in 5 years. The three Xerox operators are paid $10 an hour each. They usually work a 40-hour week. Machine breakdowns occur monthly on each machine, resulting in repair costs of $125 per month and overtime of 10 hours, at time-and-one-half, per machine per month, to complete the normal monthly workload. Toner, supplies, and so on, cost $115 a month for each Xerox copier. The Brother system will require only two regular operators, on a regular work week of 40 hours each, to do the same work. Rates are $12 an hour, and no overtime is expected. Toner, supplies, and so on, will cost a total of $4,200 annually. Maintenance and repairs are fully serviced by Brother for $525 annually. (Assume a 52-week year.)
Present Value of Ordinary Annuity of $1 at 5 years, 12% = 3.6048
1)Using DCF techniques, compute the PV of all relevant cash flows, under both alternatives, for the 5-year period discounted at 12%. As a nonprofit university, Portland State does not pay income taxes.
2)Should Portland State keep the Xerox copiers or replace them if the decision is based solely on the given data?
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