In order to print all of its forms in-house, the Prism health plan is considering the purchase of 10 new printers at a total cost of $30,000. Prism estimates that the proposed printers have a useful life of 5 years. Under its current system, Prism spends $10,000 a year to have forms printed by a local printing company. Assume that Prism selects a 15% discount rate based on its weighted average costs of capital.
Prism will use both the payback method and the discounted payback method to analyze the worthiness of this potential capital investment. Prism's decision rule is to accept all proposed capital projects that have payback periods of four years or less. Now assume that Prism decides to use the net present value (NPV) method to evaluate this potential investment's worthiness and that Prism will accept the project if the project's NPV is greater than $4,000.
Using the NPV method, Prism would correctly conclude that this project should be:
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