Question

# QUESTION 6 A new computer system is expected to cost \$40 million and generate annual savings...

QUESTION 6

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 12 percent?

 Yes, because the net present value of the project is \$3,257,314. No, because the net present value of the project is -\$3,257,314. Yes, because the net present value of the project is \$20 million. No, because the net present value of the project is -\$20 million. Yes, because the net present value of the project is \$4,980,000.

 PV of annuity for making pthly payment P = PMT x (((1-(1 + r) ^- n)) / i) Where: P = the present value of an annuity stream PMT = the dollar amount of each annuity payment r = the effective interest rate (also known as the discount rate) i=nominal Interest rate n = the number of periods in which payments will be made PV of cash inflow over 5 years = 12* (((1-(1 + 12%) ^- 5)) / 12%) 43.257314 PV of cash outflow (40.000000) Net Present Value 3.257314 Yes, Project should be accepted as this will generate NPV of 3,257,314