Present Value Analysis in Nonprofit Organizations: The Oakland Naval Shipyard bought machine 1 on March 5, Year 1, for $5,000 cash. The estimated salvage was $200, and the estimated life was 11 years. On March 5, Year 2, the company learned that it could purchase a different machine for $8,000 cash. The new machine would save the company an estimated $250 per year compared to machine I. The new machine would have no estimated salvage value and an estimated life of 10 years. The company could get $3,000 for machine 1 on March 5, Year 2. As a government agency, the shipyard pays no taxes.

Required:

a. Which of the following calculations would best assist the company in deciding whether to purchase the new machine?

(1) Present value of $250 savings per year + $3,000 - $8,000. (2) Present value of $250 savings per year - $8,000. (3) Present value of $250 savings per year + $3,000 - $8,000 - $5,000. (4) Present value of $250 savings per year + $3,000 - $8,000 - $4,750.

b. Calculate the net present value of the purchase of the new machine using differential costs. Assume a 12 percent discount rate. (Refer to Illustration 15-10, Appendix B, for annuity factors.)

c. Should the Oakland Naval Shipyard invest in the new machine?