Tiger’s Place is a not-for-profit nursery run by the parents of the enrolled children. Since the school is out of town, it has a water storage tank rather than city water supply. After a flock of birds accidentally fell into the tank, the tank water became contaminated. The school has had to purchase large water containers to provide drinking water for the children, which are delivered each week. The school’s management committee is considering building a larger, more modern water storage tank. The committee estimates that this would cost $14125 and save the school $2500 annually for 10 years. The pre-school’s required rate of return is 6 per cent. Income taxes are not relevant.
Calculate the new water tank’s net present value. Should the management committee approve the new project?