Replacement of Office Equipment

Midwestern 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 $3,500. Midwestern's three Xerox machines were purchased for $8,000 each, 5 years

ago. Their expected life was 15 years. Their resale value now is $1,750 each and will be zero in 10

more years. The total cost of the new Brother equipment will be $60,000; it will have zero disposal

value in 10 years.

The three Xerox operators are paid $12 an hour each. They usually work a 40-hour week. Machine

breakdowns occur monthly on each machine, resulting in repair costs of $75 per month and overtime

of 6 hours, at time-and-one-half, per machine per month, to complete the normal monthly workload.

Toner, supplies, and so on, cost $50 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 $14 an hour, and no overtime is expected. Toner, supplies, and

so on, will cost a total of $4,500 annually. Maintenance and repairs are fully serviced by Brother for

$600 annually. (Assume a 52-week year.)

1. Using DCF techniques, compute the PV of all relevant cash flows, under both alternatives,

for the 10-year period discounted at 14%. As a nonprofit university, Midwestern does not pay

income taxes.

2. Should Midwestern 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?