Question

8. Sears is evaluating the choice between paper check disbursement and ACH disbursement. Sears would incur up-front investment costs of $40,000. Based on a perpetuity of 1,000 payments per month, per-payment savings if 40 cents, annual cost of capital is assumed to be 5%. a. What is the NPV of the decision to convert to ACH? b. What is the minimum number of payments per month in order to justify the cost to convert to ACH disbursing?

Answer 1

a: NPV = Cost -PV of savings perpetuity

= -40000+1000*0.4/(5%/12)

= -40000+96000

=$56000

b: Since the cost is 40,000, the PV of savings should be $40,000

40000=Savings/rate

Savings = 40000*5%/12 = 166.6667

Number of payments = 166.6667/0.4 = 416.67 rounded off to

417 payments per month