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
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:
Investment (outflow at time 0) $7,050,000
Periodic operating cash flows:
Annual cash savings because outside laboratories are not used 1,580,000
Additional cash outflow for people and supplies to operate the equipment 380,000
Salvage value after seven years, which is the estimated life of this project 580,000
Discount rate 6%
Use this chart:
a. Calculate the net present value of this decision. (Round PV factor to 3 decimal places.)
b.Should the organization buy the equipment?
yes or no.
Exhibit A.8 Present Value of $1 Year 5% 6% 8% 10% 12% 14% 15% 16% 18% 20% 1 0.952 0.943 0.926 0.909 0.893 0.877 0.870 0.862 0.847 0.833 2 0.907 0.890 0.857 0.826 0.797 0.769 0.756 0.743 0.718 0.69 3 0.864 0.840 0.794 0.751 0.712 0.675 0.658 0.641 0.609 0.579 4. 0.823 0.792 0.735 0.683 0.636 0.592 0.572 0.552 0.516 0.482 5 0.784 0.747 0.681 0.621 0.567 0.519 0.497 0.476 0.437 0.402 0.746 0.705 0.630 0.564 0.507 0.456 0.432 0.410 0.370 0.335 6 7 0.711 0.665 0.583 0.513 0.452 0.400 0.376 0.354 0.314 0.279 8 0.677 0.627 0.540 0.467 0.404 0.351 0.327 0.305 0.266 0.233 0.645 0.592 0.500 0.424 0.361 0.308 0.284 0.263 0.225 0.194 9 10 0.614 0.558 0.463 0.386 0.322 0.270 0.247 0.227 0.191 0.162 11 0.585 0.527 0.429 0.350 0.287 0.237 0.215 0.195 0.162 0.135 12 0.557 0.497 0.397 0.319 0.257 0.208 0.187 0.168 0.137 0.112 13 0.530 0.469 0.368 0.290 0.229 0.182 0.163 0.145 0.116 0.093 14 0.505 0.442 0.340 0.263 0.205 0.160 0.141 0.125 0.099 0.078 15 0.481 0.417 0.315 0.239 0.183 0.140 0.123 0.108 0.084 0.065 Year 225 24% 25% 26% 28% 30% 32% 34% 35% 40% 1 0.820 0.806 0.800 0.794 0.781 0.769 0.758 0.746 0.741 0.714 2 0.672 0.650 0.610 0.630 0.610 0.592 0.574 0.557 0.519 0.510 3 0.551 0.524 0.512 0.500 0.477 0.455 0.435 0.416 0.406 0.364 4 0.451 0.423 0.410 0.397 0.373 0.350 0.329 0.310 0.301 0.260 5 0.370 0.341 0.328 0.315 0.291 0.269 0.250 0.231 0.223 0.186 6 0.303 0.275 0.262 0.250 0.227 0.207 0.189 0.173 0.165 0.133 7 0.249 0.222 0.210 0.198 0.178 0.159 0.143 0.129 0.122 0.095 S 0.204 0.179 0.168 0.157 0.139 0.123 0.108 0.096 0.091 0.068 9 0.167 0.144 0.134 0.125 0.108 0.094 0.082 0.072 0.067 0.048 10 0.137 0.116 0.107 0.099 0.085 0.073 0.062 0.054 0.050 0.035 11 0.112 0.094 0.086 0.079 0.066 0.056 0.047 0.040 0.037 0.025 12 0.092 0.076 0.069 0.062 0.052 0.043 0.036 0.030 0.027 0.018 13 0.075 0.061 0.055 0.050 0.040 0.033 0.027 0.022 0.020 0.013 14 0.062 0.049 0.044 0.039 0.032 0.025 0.021 0.017 0.015 0.009 15 0.051 0.040 0.035 0.031 0.025 0.020 0.016 0.012 0.011 0.006 Net present valueStep by Step Solution
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