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.

Required:

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

Investment (outflow at time 0) $ 5,150,000 Periodic operating cash flows: Annual cash savings because outside laboratories are not used 1,460,000 Additional cash outflow for people and supplies to operate the equipment 260,000 Salvage value after seven years, which is the estimated life of this project 460,000 Discount rate 15 %

Explanation / Answer

Net annual cash flows = 1460000-260000 = 1200000 Present value of net annual cash flows 4992000 =1200000*4.16 Present value of salvage value 172960 =460000*0.376 Total present value of cash flows 5164960 Less: Investment 5150000 Net present value 14960 Alternatively Net present value will be $16160 if PV factor is rounded off to 4.161

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