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.

Investment (outflow at time 0)	$	6,500,000
Periodic operating cash flows:
Annual cash savings because outside laboratories are not used		1,510,000
Additional cash outflow for people and supplies to operate the equipment		310,000
Salvage value after seven years, which is the estimated life of this project		510,000
Discount rate		8	%

Required:

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

Should the organization buy the equipment?

	Yes
	No