Western Kansas University is considering replacing some Ricoh copiers with faster copiers purchased from Kodak. The administration is very concerned about the rising costs of operations during the last decade.
To convert to Kodak, two operators would have to be retrained. Required training and remodeling would cost $4,000.
Western Kansas's Three Ricoh machines were purchased for $10,000 each, five years ago. Their expected life was ten years. Their resale value now is $1,000 each and will be zero in five more years. The total cost of the new Kodak equipment will be $54,000; it will have zero disposal value in five years.
The three Ricoh operators are paid $8 an hour each. They usually work a 40-hour week. Machine breakdowns occur monthly on each machine, resulting in repair costs of $50 per month and overtime of four hours, at time-and-one-half, per machine per month, to complete the normal monthly workload. Toner, supplies, and so on, cost $100 a month for each Ricoh copier.
The Kodak system will require only tow regular operators, on a regular work week of 40 hours each, to do the same work. Rates are $10 an hour, and no overtime is expected. Toner, supplies, and so on, will cost a total of $3,300 annually. Maintenance and repairs are fully serviced by Kodak for $1,050 annually. (Assume a 52-week year.)
1. Using DCF (discounted-cash-flow) techniques, compute the present value of all relevant cash flows, under both alternatives, for the five-year period discounted at 12%. As a nonprofit university, Western Kansas does not pay income taxes.
2. Should Western Kansas keep the Ricoh copiers or replaced them if the decision is based solely on the given data?
3. What other considerations might affect the decision?
The solution explains the use of discounted cash flow in making a replacement decision