2. Joe Cue, assistant treasurer at Ocean Floor Drilling, is evaluating his firm’

Question

2. Joe Cue, assistant treasurer at Ocean Floor Drilling, is evaluating his firm’s disbursement system. 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%. Joe estimates that it would cost about $15,000 to fully switch 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 ACH. Assume that the firm will remain a going concern in perpetuity.

Explanation / Answer

Initial Cost = $15,000
Cost Saving/Disbursement = ($1.1 - $0.1) = $1
Total Savings/Year = 2000*$1 = $2,000

NPV = -$15,000 + Annual Savings/Discount Rate
NPV = -$15,000 + $2,000/0.05
NPV = -$15,000 + $40,000 = $25,000

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