A-14 Present Value Analysis in Nonprofit Organizations The Johnson Research Orga

Question

A-14 Present Value Analysis in Nonprofit Organizations 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 $7,000,000 Investment (outflow at time 0) Periodic operating cash flows: Annual cash savings because outside laboratories are not used Additional cash outflow for people and supplies to operate the equipment 1,500,000 300,000 500,000 Salvage value after seven years, which is the estimated life of this project Discount rate 6% Required: Calculate the net present value of this decision. (Round PV factor to 3 decimal places.) et present value Should the organization buy the equipment? O Yes No

Explanation / Answer

Solution:

As NPV is positive, therefore organization should buy the equipment.

Computation of NPV - Johnson Research Organization Particulars Period Amount PV Factor Present Value Cash outflows: Initial Investment 0 $7,000,000 1 $7,000,000 Present value of cash outflows (A) $7,000,000 Cash Inflows: Annual cash inflows 1-7 $1,200,000 5.582 $6,698,400 Salvage Value 7 $500,000 0.665 $332,500 Present value of cash inflow (B) $7,030,900 NPV (B-A) $30,900

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