1.The operations department of a major FI is planning to reorganise several of its back-office functions. Its current operating expense is $1 500 000, of which $1 000 000 is for staff expenses. The FI uses a 12 per cent cost of capital to evaluate cost-saving projects.

One way of reorganising is to outsource overseas a portion of its data entry functions. This will require an initial investment of approximately $500 000 after taxes. The FI expects to save $100 000 in annual operating expenses. Should it undertake this project, assuming that this change will lead to permanent savings?

Another option is to automate the entire process by installing new state-of-the-art computers and software. The FI expects to realise more than

$500 000 per year in after-tax savings, but the initial investment will be approximately $3 000 000. In addition, the life of this project is limited to seven years, at which time new computers and software will need to be installed. Using this seven-year planning horizon, should it invest in this project?

What level of after-tax savings would be necessary to make this plan comparable in value creation to the plan in part (a)? LO 17.2