Question: Initial Cost = $15,000 Cost Saving/Disbursement = ($1.1 - $0.1) = $1 Total Savings/Year = 2000 x $1 = $2,000.00 NPV = -$15,000 + Annual
Initial Cost = $15,000
Cost Saving/Disbursement = ($1.1 - $0.1) = $1 Total Savings/Year = 2000 x $1 = $2,000.00
NPV = -$15,000 + Annual Savings/Discount Rate NPV = -$15,000 + $2,000/0.05 NPV = -$15,000 + $40,000 = $25,000.00
3.
a.
| Particulars | Scenario 1 | Scenario 2 | Scenario 3 |
| Cost of Check | $1.10 | $1.10 | $1.10 |
| ACH Cost | $0.10 | $0.10 | $0.10 |
| Savings | $1.00 | $1.00 | $1.00 |
| Number of Disbursements | 500 | 2000 | 10000 |
| Savings/Year | $500.00 | $2,000.00 | $10,000.00 |
| Savings for Infinite Period | $10,000.00 | $40,000.00 | $200,000.00 |
| Cost of Switching | $15,000.00 | $15,000.00 | $15,000.00 |
| NPV | -$5,000.00 | $25,000.00 | $185,000.00 |
Scenario 1= Check is the better option
Scenario 2= ACH is the better option
Scenario 3= ACH is the better option
Answer the following:
b. Solve for the number of payments that results in an NPV of $0
c. Now Joe wants to focus on opportunity cost. Sepcifically, he wants to know the maximum opportunity cost at which the decision to switch will be managable. Accordingly, solve for the opportunity cost that result in NPV of $0. Use the base assumption of 2,000 disbursements.
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