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The Johnson Research Organization, a nonprofit organization that does not pay taxes, is considering buying laboratory...

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) $ 6,430,000
Periodic operating cash flows:
Annual cash savings because outside laboratories are not used 1,410,000
Additional cash outflow for people and supplies to operate the equipment 210,000
Salvage value after seven years, which is the estimated life of this project 410,000
Discount rate 8 %

Required:

Calculate the net present value of this decision

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Answer #1
Annual cash savings 1410000
Less: Additional cash outflow 210000
Net annual cash flows 1200000
Year Now 1 2 3 4 5 6 7
Investment cost -6430000
Net annual cash flows 1200000 1200000 1200000 1200000 1200000 1200000 1200000
Salvage value 410000
Total cash flows -6430000 1200000 1200000 1200000 1200000 1200000 1200000 1610000
X PV factor 8% 1 0.926 0.857 0.794 0.735 0.681 0.630 0.583
Present value of cash flows -6430000 1111200 1028400 952800 882000 817200 756000 938630
Net present value 56230
2 1
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