Westcoast trucking is a Canadian regional trucking company. The business has been growing both in terms of volume and geographic coverage. The management is thinking of replacing the existing fleet of trucks to meet their business needs. Given the nature of its business, careful planning of truck routing and utilization of truck payload is very important to optimize revenue and minimize capacity wastage. The company has been using a revenue management system for order taking, truck route planning, and scheduling.

Total truck fleet replacement would require $2 million while the existing fleet has a salvage value of $500,000. The companys weighted average cost of capital is 15% and a marginal tax rate of 30%.

Management also believes that the existing revenue management system needs to be enhanced to cope with the growing demand. The management engaged a revenue management consulting firm to evaluate their business needs. The consultant fee cost $40,000. The consultant proposes two options to the management team. Option A would cost $195,000, while Option B would cost $350,000.

Option A is a semi-automated revenue management planning solution that can enhance the revenue generation decision of their analyst team.

Option B is a fully automated solution that can enhance revenue generation and additional savings on analyst resources.

Another possibility is to internally develop a revenue management planning solution. The IT department has the resources for semi-automated revenue management development using existing capacity. However, it will take 2 years to develop. IT department estimated 200 hours at a $400 per hour rate is required for this project. The hardware is common to each option, and the salvage value of the hardware is expected to be zero after 3 years.

The expected net cash flow of each option is as follows:

Year 1 Year 2 Year 3 Year 4 Year 5

Option A $90,000 $90,000 $70,000 $70,000 $50,000

Option B $160,000 $160,000 $150,000 $145,000 $130,000

Internal Develop 0 0 $70,000 $70,000 $50,000

The management would like to know the net present value of each scenario of revenue management system on the table. Furthermore, the CEO and Marketing Head are very concerned about the time to market for the software system. Rapid technology development means that the system may become obsolete earlier than the projection. They want to see if the net present value still makes sense within a three-year time frame. The CFO suspects the discount rate may go up by 2% if the central banks monetary tightening policy continues.

Plese write an executive summary, identify problem and Calculate for after tax cash flow, NPV ( Tax Cost of capital allowance), recommending the best approach to the revenue management system initiative taking considerations from a financial perspective, business risks and opportunities views.