Just in-Time Distributors, an operator of a large distribution network of health-related products, is considering an automated materials-handling system for its major warehouse in Toronto to reduce storage space, labour costs, and product damage. The automation equipment will cost $7,375,000, payable at the time of acquisition. The equipment has a useful life of four years and no residual disposal price. The lease on the warehouse will expire in four years and is not expected to be renewed. The company has a marginal income tax rate of 40% and an after-tax required rate of return of 12%. Under existing tax laws, the $7,375,000 of the equipment cost will qualify for a capital cost allowance rate of 30%, declining balance. The before-tax net cash operating savings from the automation are estimated to be $3,000,000 a year.
REQUIRED
1. Compute
(a) The net present value and
(b) The payback period on the automated materials handling project.
2. Calculate the minimum annual before-tax net cash operating savings that will make the automated material-handling equipment desirable from a net present value standpoint.
3. What other factors should Just-in-Time Distributors consider in its decision?