Question

You have two options for purchasing new copier, COPY1 and COPY2. The two copiers have an identical ability to generate revenues but different lifespans and cost structures:

a- COPY1 costs $5,000 to install (at t = 0) and $2,000 per year to operate for next 7 years. It will be sold for $1,100 at the end of year 7 (i.e., salvage value at t = 7).
b- COPY2 costs $9,000 to install (at t = 0) and $1,500 per year to operate for next 8 years. It will be sold for $2,000 at the end of year 8 (i.e., salvage value at t = 8).
Suppose that the cost of capital for this project is 13%. Determine which copier you should choose and explain why.Hint: The salvage value of each copier should be a part of its terminal cash flows. Be careful about the sign of the salvage value: +.

Answer 1

To determine which copier to choose, calculate the NPV of each option using the formulas provided. The copier with the higher NPV should be chosen.

Step-by-step explanation:

To determine which copier to choose, we need to calculate the net present value (NPV) of each option. The NPV takes into account the initial costs, operating costs, salvage value, and the cost of capital.

For COPY1, the NPV can be calculated using the formula:

NPV = -5000 + Σ (-2000/(1+0.13)^n) + 1100/(1+0.13)^7

Similarly, for COPY2, the NPV can be calculated using the formula:

NPV = -9000 + Σ (-1500/(1+0.13)^n) + 2000/(1+0.13)^8

After calculating the NPV for both options, the copier with the higher NPV should be chosen. This indicates that the copier will generate a higher return on investment.