A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years. Should the bank invest in this project if the discount rate is 18 percent?
A)Yes, because the net present value of the project is $2,473,948.
B)No, because the net present value of the project is -$2,473,948.
C)Yes, because the net present value of the project is $24.8 million.
D)No, because the net present value of the project is -$24.8 million.
E)Yes, because the net present value of the project is $1,342,688.

Question

Quizplus · Accepted Answer

Using the net present value formula, the present value of the savings generated over five years is $44.4 million. Subtracting the initial cost of $40 million gives a net present value of $4.4 million. However, since the discount rate is 18 percent, the net present value is actually negative, resulting in a decision to not invest in the project.

A New Computer System Is Expected to Cost $40 Million