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.
Calculate the following values if the computerised tracking system is implemented.
Incremental sales in Year 1
$ —————-
Savings in vehicle running costs in Year 1
$ ———————————-
Present value of the maintenance costs over the life of the contract
$ ————————————-

Dear Sir,

Good day to you.

Please explain above question.

Thanks