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    Capital budgeting: Finance: Show they purchase the asset?

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    Should We Purchase That New Copier? Campus Print Shop is thinking of purchasing a new, modern copier that automatically collates pages. The machine would cost $22,000 cash. A service contract on the machine, considered a must because of its complexity, would be an additional $200 per month. The machine is expected to last eight years and have a resale value of $4,000. By purchasing the new machine, Campus would save $450 per month in labor costs and $100 per month in materials costs due to increased efficiency.

    Other operating costs are expected to remain the same. The old copier would be sold for its scrap value of $1,000. Campus requires a return of 14% on its capital investments.

    1. As a consultant to Campus, compute: The payback period

    2. On the basis of these computations and any qualitative considerations, would you recommend that Campus purchase the new copier?

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    Solution Preview

    1. As a consultant to Campus, compute: The payback period

    Compute the cashflows of buying the copier:

    Year Outflow Inflow Cashflow Remaining cash
    Investment -22,000
    0 1,000 1,000 -21,000
    1 -2,400 6,600 4,200 -16,800
    2 -2,400 6,600 4,200 -12,600
    3 -2,400 ...

    Solution Summary

    Process for analyzing asset purchases is a classic! Student is given the response and an excel file with the process worked out to use as a template for future assignments.