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You have just been hired as a consultant for the Miller Park Zoo in Bloomington, IL

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You have just been hired as a consultant for the Miller Park Zoo in Bloomington, IL. They are looking to replace their Christmas light displays to be more energy efficient. The old displays have a 3-year lifespan left, and the new upgrades will last 3 years. The Zoo is a nonprofit, so depreciation and taxes do not matter. The zoo has a cost of capital of 4%. You are given the following information:  

 

Old Lights ?

Cost $25,000 a year to operate ?

Will last 3 more years ?

Salvage value of $5,000 today ?

No salvage value in 3 years ?

Requires an inventory of $2,000 for spare parts ?

Cost $87,000 when they were bought 10 years ago 

 

New Lights ?

Costs $9,000 a year to operate ?

Will last 3 years ?

Salvage value of $4,500 in 3 years ?

Requires an inventory of $3,000 for spare parts ?

Will cost $50,000 to purchase 

 

a) If the zoo accepts the project, what is the change in their cash flow each year? (i.e. What is the incremental cash flow in years 0, 1, 2, and 3. This is asking for four numbers. (Circle your answers for these four numbers!). The answer should be in the form of a pro forma statement. Be sure to label all your categories thoroughly, as the pro-forma statement is part of your answer that is being graded. Be sure to explain any calculations you do to get numbers in the pro forma statement.

 

b) Should you advise the zoo to purchase the new lights? Show your calculations, and explain how you arrived at your decision.