Crown Bank has a single banking office located in the central business district of a medium-sized town. As the population moved north to the suburbs, Crown Bank saw its share of local banking deposits and profits decline. The bank's vice president has proposed that Crown Bank try to reverse this trend by building a satellite branch in one ofthe new, affluent northern suburbs. He has presented the bank's executive committee with the following information:

• The initial cost of the new building and equipment will be E4 million.
• Based upon town planning surveys, Crown Bank expected to operate out ofthis branch for only 4 years, at the end of which time they expect to be able to sell the building and equipment for El million.
• The building and equipment will be depreciated over their 4-year life using straightline depreciation to a zero balance.
• The bank's net working capital must be increased by El 000 000 to accommodate the new branch. This net working capital will be liquidated and made available to the bank for other uses upon termination of the project.
• Based on customer surveys, population trends, competitor location and the experience that other banks have had with their branches, it is estimated that the annual revenue from the new branch will be El 750 000 (before tax).
• The cost of the customer survey and other research into the viability of the move, totaled E500 000.
• The new branch will incur E900 000 per annum in operating expenses (excluding depreciation).
• The bank's marginal tax rate is 30% and its required rate of return on investments, such as this one, is 10%.
• All cash flows will occur at year-end, except for the initial cost of the building and equipment and the net working capital requirement, which will occur at the outset.

Required:

(a) Calculate the Net Present Value of the project and state the outcome of your calculations, regarding whether the proposal should be accepted or not by the committee.

Round offall factors to four decimal places and values to the nearest cent.

(20 marks: 36 minutes) Hint: It is not necessary to draw up a table including all 4 years, or discount each year separately, when years 1-3 will be identical. Use your annuity formula!