Joe Cue, assistant treasurer at Ocean Floor Drilling, is evaluating his firm\'s

Question

Joe Cue, assistant treasurer at Ocean Floor Drilling, is evaluating his firm's disbursement sys tem. He has determined that each check costs $1.10, while an ACH only costs $0.10. The firm's opportunity cost of funds is 5 from check to ACH-based disbursements. Further, Joe expects that the firm will make 2,000 disbursements per year. Using the information from above, calculate the NPV of switching to 2. %. Joe estimates that it would cost about S 15,000 to fully switch ACH. Assume that the firm will remain a going concern in perpetuity.

Explanation / Answer

By switching savings per disbursement= 1.1-0.1= 1USD per disbursement

Per year total= 2000 disbursements

savings per year= 2000*1= 2000USD

It is perpetual, so present value of perpetuity = return per year/discount rate= 2000/5%= 40000

Initial investment is 15000

NPV=40000-15000= 25000

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