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) |
$ |
6,950,000 |
|
| Periodic operating cash flows: |
|
|
|
| Annual cash savings because outside laboratories |
|
|
|
| are not used |
|
1,420,000 |
|
| Additional cash outflow for people and supplies to operate |
|
|
|
| the equipment |
|
220,000 |
|
| Salvage value after seven years, which is the estimated |
|
|
|
| life of this project |
|
420,000 |
|
| Discount rate |
|
6 |
% |
|
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.)