Spruce Bank Is Planning to Automate Some of Its Back

question 20

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.
-Should the bank undertake the project given the above information?

• 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 lower than 12 percent.

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Definitions:

Variable Manufacturing Costs

Costs that vary directly with the level of production, including expenses like raw materials and direct labor.

Variable Costing Income

An income calculation method that only includes variable costs - costs that fluctuate with production levels - in determining net income.

Absorption Costing Income

A company's income statement approach which includes all costs of production (both fixed and variable) in the cost of goods sold, thereby fully absorbing them.

Variable Cost Ratio

The proportion of variable costs to sales, showing the impact of production volume on total costs.