Capital project, inflation, income taxes. Pipe-it Inc. wishes to modernize its facilities which refurbish used pipeline equipment. Robotic machinery appears to be the best option for the spot-welding process. The investment will cost $12,750,000 payable immediately. The introduction of the new equipment is expected to reduce labour costs, worker insurance costs, and materials usage costs by a total of $8.4 million (in January 1, 2010, dollars) a year. At the same time, the robots will require an addition to annual cash operating costs of $3.6 million (in January 1, 2010, dollars) a year. As a bonus, Pipe-it believes that using the robots will eliminate industrial accidents involving workers at the spot-welding activity. The robots have a four-year useful life with a terminal disposal price of $1,350,000 (in January 1, 2010, dollars). The robots qualify for a 25% declining balance capital cost allowance rate. Pipe-it anticipates inflation in its operating costs and in the terminal disposal price of the robots of 20% per year. It uses a 10% after-tax required rate of return for invest- ments expressed in real dollars. Pipe-it's income tax rate is 40%. REQUIRED 1. What is the nominal after-tax required rate of return of Pipe-it for investments expressed in nominal dollars? 2. What is the net present value of the $12-million investment in robots? Use the approach of predicting cash inflows and outflows in nominal dollars and using a nominal discount rate. 3. What are the advantages of the approach to capital budgeting for inflation in requirement 2 relative to the approach of predicting real cash inflows and outflows and using a real dis- count rate? 4. What factors other than the net present value figure in requirement 2 should Pipe-it con- sider in deciding whether or not to invest in robots?

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