Spruce Bank Is Planning to Automate Some of Its Back

question 35

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

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Definitions:

Effort Justification

The phenomenon whereby people reduce dissonance by convincing themselves that what they suffered for is actually quite valuable.

Self-Concept Clarity

The degree to which one's beliefs about oneself are clearly and confidently defined, internally consistent, and stable.

Self-Concept Clarity

The extent to which an individual's beliefs about themselves are clearly and confidently defined, internally consistent, and stable.

Agoraphobia

The fear of places or situations that might cause panic, helplessness, or embarrassment, often leading to avoidance behaviors.