CT is planning to adopt a new automation system developed by TN. Before making the final decision,

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Question:

CT is planning to adopt a new automation system developed by TN. Before making the final decision, TN has offered a trial run of the system for 6 months. If the trial run is unsuccessful, nothing will be charged on CT. However, if the trial run is successful, TN will charge a consultation fee of RM300,000. Before the trial run, CT need to upgrade all its computer operating system to the latest version at its own cost, which is estimated to be RM200,000. The upgrading of CT’s current computer operating system is deemed necessary irrespective of CT’s decision to adopt TN’s automation system.

Once the trial run is successful, the new automation system can be installed and run on-live within the next 6 (six) months. The cost of installation is RM500,000 and a one-time training cost of RM50,000 will be spent. By end of the first year, CT is expected to enjoy the following benefits:

• An annual cost savings of RM150,000 for 5 years.

• Revenue is estimated to increase by RM300,000 for the first year and followed by a growth rate of 10% for the next two years and 4% for the remaining years. The total revenue for the last 12 months is RM6,000,000.

However, the automation system may require a yearly maintenance cost of RM75,000 and yearly depreciation of RM100,000. Expected life span for the automation system is 5 years. Ignore taxation and the cost of capital is 10%.

Required:

a)Determine whether the following items are relevant or irrelevant cash flows. If the item is identified as relevant, please state the exact yearly amount, otherwise insert the amount as zero.