Reference no: EM132990858

A major retailer in Sydney is experiencing significant problems with its transportation companies and has received many complaints from customers about late deliveries, lost packages and poor service. Management believe that this is significantly impacting the business based on feedback received from its customers. The company is considering expanding its operations to also provide the delivery function. The cost of the 50 electric delivery vans will be $95,000 each and it is expected they will be used for 5 years.

At the end of 5 years it is anticipated the delivery vans will be sold for $32,000 each. A one-off purchase of $300,000 for charging stations for the electric vehicles will be required at the time of purchasing the vans. The annual maintenance cost per vehicle will be $2,000 as per agreement. It is estimated additional labour, training and administration costs will be $3,750,000 each year but annual savings in the transportation costs paid to outside suppliers is expected to be $2,500,000 as well as the $2,300,000 generated in additional revenue charged to customers for the delivery service.

Assume a discount rate of 8% and all cashflows occur at the end of each year. Ignore any tax implications.

Question 1) Calculate NPV and provide a recommendation to management as to whether the project should proceed and outline what other factors should be considered as part of the process.