The Royal Bank of Canada (RBC) intends to install new ATMs in Montreal region. The new ATMs have a better performance and allow the customers to carry out several transactions that cant be done on actual ATMs (Money orders, exchange rate transactions.).

The actual ATMs will continue to function and new ATMs will be added to them. The total purchase cost (including installations) will be 40 million dollars. 500 ATMs will be installed in Montreal and 200 in the suburbs.

We estimate that 300 transactions/day will be carried out on each new ATM in Montreal and 100/day on each ATM in the suburbs. The customers have to pay 15 cents for each transaction and there will be a variable cost of 5 cents for RBC for each transaction.

Given the performance of the new ATMs, the bank can lay off 300 employees from different branches. The average salary of these employees is 20000$/year. On the other hand, RBC has to pay a lay off premium of 5000$ to each employee which is tax deductible. The bank should also change its computerized control system because of the new project. The actual system was purchased 15 years ago for 1 500 000$ and the supplier of the new system is ready to pay an exchange value of 500 000$ for the old system, if RBC purchases the new system for 2 500 000$. The new project demands also 10 additional technicians whose individual salary will be 30 000$/year. It also allows RBC to pay a total additional dividend of 2 000 000$/year to its shareholders.

The project is estimated to last for 10 years since the new ATMs have to be replaced afterwards. They dont have any salvage value but the new control system will be sold for 500 000$ at the end of the project. The rate of depreciation for the ATMs is at 20% and for the control system at 30% (Both depreciations are calculated with decreasing method). The companys tax rate is 40% and investors require 12% on this type of project.

Questions:

1. Identify ONE BY ONE each item of the investment and calculate the total investment in this project.
2. Identify ONE BY ONE and calculate separately the present value of each periodical cash flow (annual incomes and expenses) during the project.
3. Identify ONE BY ONE and calculate separately the present value of each cash flow of the end of the project.
4. Calculate the Net Present Value of this project (You just have to add up your responses in 1, 2 and 3 for this one).
5. Calculate the Operational Cash Flow (OCF) of the 3rd year of this project.