Scenario

You are the CFO of a Catholic School. You are asked to present recommendations to the board on two issues facing the school:

First, the administration is considering purchasing a gymnasium adjacent to your school. The gymnasium is for sale for $8 million and initial costing analysis has revealed that to get the gymnasium up and operational would require another $2 million. The average operating cost for gymnasium would be $500,000 per year. The gymnasium is estimated to bring in $1 million (per year) for the next 10 years. The gymnasium will need a major renovation after ten years and the residual value at that time will be $9 million, considering the increase in real value of property in the area over recent history.

Second, you are considering refurbishing the lighting system in your administration building. After initial investigation, the school procurement office has narrowed down the options to two: Option 1 is an Ergolight system that costs $500,000 to purchase and install. Option 2 is a conventional system that costs $100,000 to purchase and install. Both Systems are expected to last for twenty years. The energy and maintenance costs for Option 1 are $20,000 and $2,000, respectively. The energy and maintenance costs for Option 2 are $50,000 and $10,000.

Assignment

Applying cost/benefit analysis and lifecycle costing methods to the appropriate situations using the attached worksheets, calculate each scenario according to CBA and LCC principles. Be sure to enter outflows as negative numbers and inflows as positive numbers into the orange cells.

PART 1

4% Discount Rate

Year Start up Cost Operating Revenue Operating Expense Operating Net Income Residual Value Net Benefit PV

0 - -

1 - - -

2 - - -

3 - - -

4 - - -

5 - - -

6 - - -

7 - - -

8 - - -

9 - - -

10 - - -

-

5% Discount Rate

Year Start up Cost Operating Revenue Operating Expense Operating Net Income Residual Value Net Benefit PV

0 - -

1 - - -

2 - - -

3 - - -

4 - - -

5 - - -

6 - - -

7 - - -

8 - - -

9 - - -

10 - - -

-

Using NPV as the criterion for decision making from only the nonprofit perspective, and using a 5% discount rate, do you recommend the project?

PART 2

Parameters/Assumptions

Ergolight Conventional

Discount rate 4% 4%

Economic life (year)

Purchasing price

Electricity costs/year

Maintenance/year

LCC Calculation

Costs Ergolight Conventional

Purchase $0 $0

Electricity $0 $0

Maintenance $0 $0

NPV $0 $0

Parameters/Assumptions

Ergolight Conventional

Discount rate 5% 5%

Economic life (year) 0.00 0.00

Purchasing price $0 $0

Electricity costs/year $0 $0

Maintenance/year $0 $0

LCC Calculation

Costs Ergolight Conventional

Purchase $0 $0

Electricity $0 $0

Maintenance $0 $0

NPV $0 $0

Using NPV as the criterion for decision making from only the nonprofit perspective which system do your recommend?

Answer rating: 100% (QA)

Lets start by analyzing each scenario separately using both costbenefit analysis CBA and lifecycle costing LCC methods PART 1 Gymnasium Purchase CostB... View the full answer