Spruce Bank Is Planning to Automate Some of Its Back

question 53

Multiple Choice

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.

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Definitions:

Recognize Gain

The process of reporting the profit from a sale or exchange of an asset for tax purposes.

Dividend Income

Income received from owning shares of stock or mutual funds, which represents a portion of the company's profits distributed to its shareholders.

Domestic Corporation

A corporation that is incorporated under the laws of a specific country and conducts its operations primarily within that country.

Tax Returns

Tax returns are forms filed with taxing authorities that report income, expenses, and other pertinent tax information.