Question 1

CabCoownsandruns350taxisandhadsalesof$10millioninthelastyear.Cab Cois consideringintroducinganewcomputerisedtaxitrackingsystem.The expectedcostsand 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.Furthertrainingcostsof$425,000wouldberequiredinthefirst 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)Despiteincreasedsales, savingsinvehiclerunningcostsareexpectedasaresultof the new system. These are estimated at 1% of total sales.

(vi)Sixnewmembersofstaffwouldberecruitedtomanagethenewsystematatotal 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:

a)State whether each of the following items are relevant or irrelevant cashflows for a net presentvalue(NPV)evaluationofwhethertointroducethecomputerisedtracking system.

(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.

b)Calculate the following values if the computerised tracking system is implemented.

(i)Incremental sales in Year 1;

(ii)Savings in vehicle running costs in Year 1;

(iii)Present value of the maintenance costs over the life of the contract.

c)Cab Co wishes to maximize the wealth of its shareholders. It has correctly calculated the following measures for the proposed computerised tracking system project:

-The internal rate of return (IRR) is 14%,

-The return on average capital employed (ROCE) is 20% and

-The payback period is four years.

Required: Which of the following is true?

A The project is worthwhile because the IRR is a positive value

B The project is worthwhile because the IRR is greater than the cost of capital

C The project is not worthwhile because the IRR is less than the ROCE

D The project is not worthwhile because the payback is less than five years

kindly i need answers with explanation