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

Ontime Distributors operates a large distribution network for health-related products. It capital BUDGETING:

is considering an automated materials-handling (AMH) proposal for its major warehouse to reduce storage space, labour costs, and product damage. The before-tax net cash operating savings from die automation are estimated to be $3.0 million a year. The AMH equipment will cost $7.2 million, payable immediately. The equipment has a useful life of four years and a zero terminal disposal price. The lease on the warehouse expires in four years and is not expected to be renewed. The company has an income tax rate of 40% and an after-tax required rate ofreturn of 12%. Under existing tax laws, the $7.2-million equipment cost qualifies for a capital cost allowance rate of 30%, declining balance.

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 AMH equipment desirable from a net present value standpoint.

3. What other factors should Ontime Distributors consider in its decision?