Moosehead Community Centre, a not for profit organization not subject to income taxes, is considering the purchase of a new snowplow costing $20,000. The estimated useful life is eight years, with no salvage value. Moosehead's minimum expected return is 12%, and it has a four-year cut-off guideline when evaluating an investment project. Moosehead uses straight-line amortization. The manager estimates the following savings in cash operating costs:
Year ...........................Amount
1 ................................$ 5,200
2 ..................................4,800
3 ..................................4,400
4 ..................................3,600
5 ..................................3,200
6 ..................................2,800
7 ..................................2,200
8 ..................................1,800
Total ...........................$28,000
REQUIRED
A. What is the net present value of this investment?
B. What is the accrual accounting rate of return based on the initial investment? Use the average annual savings when computing the numerator.
C. What is the payback period?
D. Based on the financial evaluation, would you recommend the investment?