An office prints 200,000 pages per year. The Dell brand printers costs $1100 and
ID: 2622616 • Letter: A
Question
An office prints 200,000 pages per year. The Dell brand printers costs $1100 and will produce a total of 600,000 copies before it wears out (3 year life). The Cannon brand machine costs $1,800 and will produce 1,000,000 copies in its 5 year life. Maintenance and material costs are $.05 a page for the Dell machine and $.03 with Cannon machine. The Dell machine has a salvage value of $150 and the Cannon machine will have a salvage value of $225. The required return is 8 percent a year. Which machine should the company acquire? Show numbers and assume year-end cash flows for simplicity.
Net present value for Dell copier_____________ Equivalent annuity for Dell copier_________
Net present value for Cannon copier____________ Equivalent annuity for Cannon copier_________
Which copier should be chosen? _______________
Explanation / Answer
Dell machine:
Initial cost = 1100
Expense every year = no of copies/yr * cost per page = 200,000 * 0.05 = 10,000
Present value of total cost = 1100 + 10,000 * (1-1/(1+8%)^3) / 8% = $ 26,870.97
Let Equivalent annuity be X
Then 26,870.97 = X * (1-1/(1+8%)^3) / 8% = X * 2.577
Solving, we get X = equivalent annuity = $ 10,426.84
Canon machine:
Initial cost = 1800
Expense every year = no of copies/yr * cost per page = 200,000 * 0.03 = 6,000
Present value of total cost = 1800 + 6,000 * (1-1/(1+8%)^5) / 8% = $ 25,756.26
Let Equivalent annuity be Y
Then 25,756.26 = Y * (1-1/(1+8%)^5) / 8% = Y * 3.9927
Solving, we get Y = equivalent annuity = $ 6,450.82
So final answer is:
NPV for Dell copier is -$26,870.97 and equivalent annuity is -$10,426.84
NPV for Canon copier is -$25,756.26 and equivalent annuity is -$6,450.82
As equivalent annuity for Canon is lower (i.e. it has a lower cost per year as compared to Dell), we should choose the Canon copier.
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