Automated materials-handling capital project, income taxes, sensitivity analysis. Just-

1.a Total present value in-Time Distributors, an operator of a large distribution network of health-related products, of recurring after-tax is considering an automated materials-handling system for its major warehouse in Toronto operating savings, to reduce storage space, labour costs, and product damage. The automation equipment will

$5,466,600 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 materialshandling 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?

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