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?
A)Yes, because the net present value of the project is $3,257,314.
B)No, because the net present value of the project is -$3,257,314.
C)Yes, because the net present value of the project is $20 million.
D)No, because the net present value of the project is -$20 million.
E)Yes, because the net present value of the project is $4,980,000.

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount the expected savings using the discount rate of 12%. 
NPV = -40 + (12/1.12) + (12/1.12^2) + (12/1.12^3) + (12/1.12^4) = $3,257,314
Since the NPV is positive, the bank should invest in the project.

A New Computer System Is Expected to Cost $40 Million