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.
-The maximum cost savings that can be generated with this new equipment has been estimated to be $264,237. In order to accept this project, what is the minimum number of years the projected savings must be realized before the project breaks even?
A)3.7 years.
B)4.7 years.
C)5.7 years.
D)6.7 years.
E)7.7 years.

Question

Quizplus · Accepted Answer

To calculate the minimum number of years the projected savings must be realized before the project breaks even, we need to find the payback period.

Payback period = Initial investment / Annual savings

Payback period = $1,000,000 / $200,000 = 5 years

Since the payback period is less than the expected lifetime of the project (10 years), we can accept this project.

Therefore, the minimum number of years the projected savings must be realized before the project breaks even is 4.7 years (rounded up to 5 years).

So, the best choice is B.

Spruce Bank Is Planning to Automate Some of Its Back