The Johnson Research Organization, a nonprofit organization that does not pay ta

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) Periodic operating cash flows: $7,000,000 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 0% Required: Calculate the net present value of this decision. Round PV factor to 3 decimal places.) Net present value Should the organization buy the equipment? Yes No

Explanation / Answer

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Year 0 1 2 3 4 5 6 7 Net Outflow-Investment -7000000 Annual Saving 1500000 1500000 1500000 1500000 1500000 1500000 1500000 Additional Outflow -300000 -300000 -300000 -300000 -300000 -300000 -300000 Salvage Value 500000 A Net CashFlow -7000000 1200000 1200000 1200000 1200000 1200000 1200000 1700000 B PV 6% 1/(1.06)^period 1.000 0.943 0.890 0.840 0.792 0.747 0.705 0.665 A*B Net Present Value -7000000 1132075 1067996 1007543 950512 896710 845953 1130597 31386 Since NPV is positive, Organization should buy it.

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