Spruce Bank is planning to automate some of its back office functions and reduce operating costs.The installation of new computers and software will require an initial investment of $1,000,000.The savings generated because of reduced personnel cost is $200,000 per year.The bank uses an 8 percent rate of discount to evaluate cost saving projects which are expected to last 10 years.

On further analysis,it is estimated that the project has a finite life of 5 years,i.e.further investment will be required to generate the same savings.Should they undertake the project if they assume a five-year horizon for evaluating the project?
A)Yes,because the NPV of the project is $500,000.
B)Yes,because the NPV of the project is $342,016.
C)No,because the NPV of the project is -$500,000.
D)No,because the NPV of the project is -$201,458.

Question

Spruce Bank is planning to automate some of its back office functions and reduce operating costs.The installation of new computers and software will require an initial investment of $1,000,000.The savings generated because of reduced personnel cost is $200,000 per year.The bank uses an 8 percent rate of discount to evaluate cost saving projects which are expected to last 10 years.

On further analysis,it is estimated that the project has a finite life of 5 years,i.e.further investment will be required to generate the same savings.Should they undertake the project if they assume a five-year horizon for evaluating the project?
A)Yes,because the NPV of the project is $500,000.
B)Yes,because the NPV of the project is $342,016.
C)No,because the NPV of the project is -$500,000.
D)No,because the NPV of the project is -$201,458.

Quizplus · Accepted Answer

11efbab9_0e98_1b0a_8e22_758529860a0c_TB1314_00 
NPV = $748,542 F1F1F1S1F1F1F10 $1,000,000 = F1F1F1S1F1F1F10$201,458.

Spruce Bank Is Planning to Automate Some of Its Back