Q1. 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.
Q2. Now, Joe wants to examine the sensitivity of the NPV with respect to the model's variables.
a. Upon further review, Joe determines that, in past years, the firm has had as few as 500 disbursements and as many as 10,000 disbursements. Calculate and interpret the NPVs for both scenarios.
b. Solve for the number of payments that results in an NPV of $0.
c. Now Joe wants to focus on opportunity cost. Specifically, he would like to know the maximum opportunity cost at which the decision to switch is still manageable. Accordingly, solve for the opportunity cost that results in an NPV of $0. Use the base assumption of 2,000 disbursements.