The Chicago Youth Association (CYA) and the Palmer Athletic Club (PAC) are each considering purchasing a van.
The CYA is a not‐for‐profit organization serving at‐risk inner‐city youth. It operates a center that provides after‐school tutoring, counseling, and supervised athletic activities. It would use the van mainly to drive students from their schools to the center and from the center back to their homes. The CYA estimates that the van would enable it to increase by 20 the number of students it serves at any one time. The CYA is supported entirely by contributions from the United Way and other private sources.
The PAC is a private, for‐profit, athletic facility serving the youth of a suburban community. It provides access to athletic facilities and instruction in several sports, including swimming, tennis, and gymnastics. It would use the van for the same purpose as the CYA-to transport students to and from the facility. The PAC estimates that the van would enable it to increase center capacity by 20 customers, each of whom pays weekly fees of $65.
Each organization estimates that the incremental cost of serving the additional 20 clients (including the operating costs of the van) would be $50 per client per week. Each operates 50 weeks per year.
The two vans would each cost $30,000 and have estimated useful lives of three years. Each organization estimates that its cost of capital is 10 percent.
1. Should the PAC acquire the van? Explain and show all computations.
2. Should the CYA acquire the van? Explain and show all computations.
3. Comment on any critical differences between capital budgeting in a business and a not‐for‐profit organization.