Jones Ltd is a long established company providing high quality transport for customers. It currently owns and

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Jones Ltd is a long established company providing high quality transport for customers. It currently owns and runs 350 cars and 120 buses and has a turnover of $10 million per annum.

The current system for allocating jobs to drivers is very inefficient. This is an outsourced system contracted 2 years ago for a period of 5 years and the company pays $560,000 per year. Jones Ltd is considering the implementation of a new computerised tracking system called SAP. This will make the allocation of jobs far more efficient.

You are a management accountant for Jones Ltd. You have been asked to perform some calculations to help Jones Ltd decide whether SAP should be implemented. The project is being appraised over five years and the cost of capital is 10%.

The costs and benefits of the new system are set out below.

(i) The central tracking system costs $2,100,000 to implement. This amount will be payable in three equal installments: one immediately, the second in one years’ time, and the third in two years’ time.

(ii) Depreciation on the new system will be provided at $420,000 per annum.

(iii) Staff will need to be trained how to use the new system. This will cost Jones Ltd $425,000 in the first year.

(iv) If SAP is implemented, revenues will rise to an estimated $11 million this year, thereafter increasing by 5% per annum (i.e. compounded). Even if SAP is not implemented, revenues will increase by an estimated $200,000 per annum, from their current level of $10 million per annum.

(v) Despite increased revenues, SAP will still make overall savings in terms of vehicle running costs. These cost savings are estimated at 1% of the post SAP revenues each year (i.e. the $11 million revenue, rising by 5% thereafter, as referred to in note (iv)).

(vi)Six new staff operatives will be recruited to manage the SAP system. Their wages will cost the company $120,000 per annum in the first year, $200,000 in the second year, thereafter increasing by 5% per annum (i.e. compounded).

(vii) Jones Ltd will have to take out a maintenance contract for the SAP system. This will cost $75,000 per annum.

(viii) Interest on money borrowed to finance the project will cost $150,000 per annum.

(ix) Jones Ltd has some materials in stock costing $120,000.This material will be used in the implementation of SAP tracking system. The materials have no other use in the business and it will cost $10,000 to dispose it off if it is not used on the SAP.

(x) The company will need to borrow some specialist equipment and personnel from the parent company in year three. The company costs these inter-company transfers at market rates. Here the cost will be $350 000. However, these resources are actually needed in the company at that time, so they will have to seek temporary cover while they are being used in the project.

Calculate,