Reference no: EM132752521

Cab Co owns and runs 350 taxis and had sales of $10 million in the last year. Cab Co is considering introducing a new computerised taxi tracking system. The expected costs and benefits of the new computerised tracking system are as follows:

(i) The system would cost $2,100,000 to implement.
(ii) Depreciation would be provided at $420,000 per annum.
(iii) $75,000 has already been spent on staff training in order to evaluate the potential of the new system. Further training costs of $425,000 would be required in the first year if the new system is implemented.
(iv) (Sales are expected to rise to $11 million in Year 1 if the new system is implemented, thereafter increasing by 5% per annum. If the new system is not implemented, sales would be expected to increase by $200,000 per annum.
(v) Despite increased sales, savings in vehicle running costs are expected as a result of the new system. These are estimated at 1% of total sales.
(vi) Six new members of staff would be recruited to manage the new system at a total cost of $120,000 per annum.
(vii) Cab Co would have to take out a maintenance contract for the new system at a cost of $75,000 per annum for five years.
(viii) Interest on money borrowed to finance the project would cost $150,000 per annum.
(ix) Cab Co's cost of capital is 10% per annum.

Required:

Problem 1: a) State whether each of the following items are relevant or irrelevant cashflows for a net present value (NPV) evaluation of whether to introduce the computerised tracking system. please state the reason why

(i) Computerised tracking system investment of $2,100,000.
(ii) Depreciation of $420,000 in each of the five years.
(iii) Staff training costs of $425,000.
(iv) New staff total salary of $120,000 per annum.
(v) Staff training costs of $75,000.
(vi) Interest cost of $150,000 per annum.