A firm is considering installing a sprinkler system to minimize damage in the event of a fire. The sprinkler system will last only 3 years. The initial cost of the system is $30,000. Thus, the firm will take a $10,000 depreciation expense for the equipment each year. Yearly maintenance is expected to be $2,000. If the firm installs the system, its insurance premium can be reduced by $5,000 each year and the losses are expected to decrease by $9,000 each year. The firms tax rate is 30% and its opportunity cost of capital (appropriate discount rate) is 7%.

a) What is the net present value (NPV) of the project?

b) What is the most likely decision regarding this project accept or reject? Explain.