Net Present Value for buying a machine

timer Asked: Dec 6th, 2014

Question description

The Johnson Research Organization, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of 7 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) $ 5,000,000
 Periodic operating cash flows:
 Annual cash savings because outside laboratories
 are not used 1,550,000
 Additional cash outflow for people and supplies to operate
 the equipment 350,000
 Salvage value after seven years, which is the estimated
 life of this project 550,000
 Discount rate 16 %


Calculate the net present value of this decision. Should the organization buy the equipment? (Round present value factors to three decimal places. Negative amount should be indicated by a minus sign.)

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