Question

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.

Answer 1

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