NPV

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:

(1)
The system would cost $2,100,000 to implement.
(2)
Depreciation would be provided at $420,000 per annum.
(3)
$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.
(4)

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.
(5)
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.
(6)
Six new members of staff would be recruited to manage the new system at a total cost of $120,000 per annum.
(7)
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.
(8)
Interest on money borrowed to finance the project would cost $150,000 per annum.
(9)
Cab Co’s cost of capital is 10% per annum.

In order to determine whether a computerised tracking system should be introduced, indicate whether each of the following is a relevant or an irrelevant cost for a net present value (NPV) evaluation.

Computerised tracking system investment of $2,100,000 Relevant

Depreciation of $420,000 in each of the five years Irrelevant

Staff training costs of $425,000 Relevant

New staff total salary of $120,000 per annum Relevant

Staff training costs of $75,000 Irrelevant

Interest cost of $150,000 per annum Irrelevant

Could you tell me why the Irrelevant ones are Irrelevant, please?