Solved: Midwestern University is considering replacing

some Xerox copiers with faster

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?

Midwestern University is considering replacing some Xerox copiers with faster

ANSWER
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