Reference no: EM133123829

Question - Bank4U is a small savings bank operating locally with branch offices in fifteen Welsh towns. Traditionally, the bank has been popular with the elderly population in these towns, capturing nearly 50% of this customer segment in their local markets. Bank4U has a high staff density in its branch offices, and offers tailored savings rates and loans to its customers, negotiated by its experienced local bank clerks. However, due to the proximity to several large universities, the bank is getting increasingly popular among students looking to open savings accounts and getting financing solutions for their university studies. The young students are particularly demanding customers who want to access their accounts and make financial transactions more frequently than the elderly customers, and during all hours of the day and night. In order to provide a better service to the growing student customer group, Bank4U is considering investing in an online banking system where customers would be able to access their accounts and make financial transactions themselves, rather than visiting the local branch offices and speaking to a bank clerk. This would involve investing £10 million in servers and computer software that would have an expected useful life of 3 years. The disposal value of the servers is expected to be £2 million at the end of the 3rd year. It is estimated that the new online banking system could generate additional revenues of £4 million per year. At the same time, the new system would require hiring software engineers for maintenance at an annual cost of £400,000. The new online banking unit would be allocated corporate overhead costs of £500,000 per year. The investment in the online banking system requires closing a third of all current branch offices. These had been fitted with new fixtures 2 years ago at a total cost of £1 million with an expected useful life of 5 years. The fixtures' estimated disposal value at the end of the 5th year is £100,000 and their current market value is £250,000. The closing of the branch offices involves laying off bank clerks with a total salary cost of £700,000 per year, that then would be saved. Assume that the tax rate is 0%.

Required - Calculate the Net Present Value of the investment in the online banking system, using a discount rate of 20% per annum. Show all your workings clearly and state any assumptions you need to make.