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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.
E. No, because the IRR of the project is greater than 15 percent.
Answer
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