FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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![**Exercise A-17 (Static) Present Value Analysis in Nonprofit Organizations**
The Minock Group, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of seven years. This purchase would eliminate the need for using outsiders' laboratories for certain types of work. The following are all 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: $950,000
- Additional cash outflow for people and supplies to operate the equipment: $150,000
- **Salvage value after seven years:** $200,000
- **Discount rate:** 6%
**Required:**
a. Calculate the net present value (NPV) of this decision.
- **Note:** Round the PV factor to 3 decimal places. Negative amounts should be indicated by a minus sign.
b. Should The Minock Group buy the equipment?
**a. Net present value**
[Input box for calculation]
**b. Should The Minock Group buy the equipment?**
[Input box for decision]
**Explanation:** This exercise involves determining whether the investment in laboratory equipment is financially viable for The Minock Group by calculating its net present value using the given discount rate and projected cash flows over the equipment's life span.](https://content.bartleby.com/qna-images/question/516bdcf2-6c27-49be-ba5f-0fdc72311a66/c65b87a9-66cd-446a-8e54-f42f4fe85bca/k2f3u9_processed.jpeg)
Transcribed Image Text:**Exercise A-17 (Static) Present Value Analysis in Nonprofit Organizations**
The Minock Group, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of seven years. This purchase would eliminate the need for using outsiders' laboratories for certain types of work. The following are all 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: $950,000
- Additional cash outflow for people and supplies to operate the equipment: $150,000
- **Salvage value after seven years:** $200,000
- **Discount rate:** 6%
**Required:**
a. Calculate the net present value (NPV) of this decision.
- **Note:** Round the PV factor to 3 decimal places. Negative amounts should be indicated by a minus sign.
b. Should The Minock Group buy the equipment?
**a. Net present value**
[Input box for calculation]
**b. Should The Minock Group buy the equipment?**
[Input box for decision]
**Explanation:** This exercise involves determining whether the investment in laboratory equipment is financially viable for The Minock Group by calculating its net present value using the given discount rate and projected cash flows over the equipment's life span.
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