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 8 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 cost 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:
a. The payback period
b. The unadjusted rate of return
c. The net present value
d. The internal rate of return
2. On the basis of these computations and any qualitative considerations, would you recommend that Campus purchase the new copier?

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Originally Posted by SBBoyer

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 8 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 cost 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:
a. The payback period
b. The unadjusted rate of return
c. The net present value
d. The internal rate of return
2. On the basis of these computations and any qualitative considerations, would you recommend that Campus purchase the new copier?

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a. payback period is five years, calculated as original cost ($22k - $1k from sale of old copier), divided by the annual savings after reducing the maintenance contract 12 months * (450+100-200).

b. the unadjusted rate of return is 79%, which is the total of all the net savings from the use of the new copies, less the net cost of the new copier (after scrap value of old copier), divided by the net cost of the new copier. So $37,600 - $21,000 / $21,000

c. The Net Present Value of the investment is -$100.47, assuming a discount rate of 14% p.a

d. The Internal Rate of return on the investment is 13.85%

Since the NPV of the investment is close to zero and the IRR is close to the 14% required return, I would recommend making the investment in the new copier.

I forgot to consider the scrap value, causing the machine cost of $21,000 vice $22,000.