Question

The Chicago Youth Association (CYA) and the Palmer Athletic Club (PAC) are each considering purchasing a van.

The CYA is a not-for-profit organization serving at-risk inner-city youth. It operates a center that provides after-school tutoring, counseling, and supervised athletic activities. It would use the van mainly to drive students from their schools to the center and from the center back to their homes. The CYA estimates that the van would enable it to increase by 20 the number of students it serves at any one time. The CYA is supported entirely by contributions from the United Way and other private sources. The PAC is a private, for-profit, athletic facility serving the youth of a suburban community. It provides access to athletic facilities and instruction in several sports, including swimming, tennis, and gymnastics. It would use the van for the same purpose as the CYA—to transport students to and from the facility. The PAC estimates that the van would enable it to increase center capacity by 20 customers, each of whom pays weekly fees of $65

Each organization estimates that the incremental cost of serving the additional 20 clients (including the operating costs of the van) would be $50 per client per week. Each operates 50 weeks per year.

The two vans would each cost $30,000 and have estimated useful lives of three years. Each organization estimates that its cost of capital is 10 percent.

1. Should the PAC acquire the van? Explain and show all computations.

2. Should the CYA acquire the van? Explain and show all computations.

3. Comment on any critical differences between capital budgeting in a business and a not-for-profit organization.

Answer 1

				CYA	CYA	CYA
			Yr		DCF@10%	DCF
			0	($30,000)	1	($30,000)
			1	($50,000)	0.91	($45,500)
			2	($50,000)	0.83	($41,500)
			3	($50,000)	0.75	($37,500)
					NPV	($154,500)
				No since the NPV is -Ve it should not purchase the van.
3	A Non Profit seeking organisation operates not for profit.Budgeting is a challenge
	for any organisation but in case of not profit seeking it is a very complex process.
	The value of non profit seeking accounting lies that tracks revenue and expenditures in the
	relevant areas and allows stakeholders to make prompt and appropriate decisions based on the
	financing decisions.Whereas the business stakeholders are concerned with profitability but the main aim of non profit seeking is not for profit only.