Question

The Johnson Research Organization, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of seven years so it will not have to use outsiders' laboratories for certain types of work. The following are all of the cash flows affected by the decision: Use Exhibit A.8.

Investment (outflow at time 0)	$	5,300,000
Periodic operating cash flows:
Annual cash savings because outside laboratories are not used		1,530,000
Additional cash outflow for people and supplies to operate the equipment		330,000
Salvage value after seven years, which is the estimated life of this project		530,000
Discount rate		14	%

Required:

Calculate the net present value of this decision. (Round PV factor to 3 decimal places.)

Should the organization buy the equipment?

• Yes

• No

Answer 1

Net Cash operating cash flows-Annual:
Annual cash savings			15,30,000
Less: Operating xpense		-3,30,000
Net cash operating cash flows-Annual	12,00,000
Multiply: Annuity PVF at 14% for 7years	4.2883
Present value of Operting Cash flows		5145960
Salvage value			530000
Multiply: PVF at 14% at 7th year		0.399637
Present value of Salvage			211808
Total Present value of inflows			5357768
Less: Initial investment			-5300000
Net present value				57768
Yes, Organization must BUY the equipment