6. NPV of JIT, After-Taxes Rate of Return (CMA adapted)
Hathaway Door Company produces door and window systems for sale to large construction companies. Hathaway’s management is considering installing a JIT system (computer system and materials-handling equipment) to better serve its customers. The facts to be considered in the decision are:
 The system will cost $1,500,000 and will have a five-year useful life. It is assumed to have zero terminal value for tax reporting of straight-line depreciation.
 Service improvements related to the system will result in a $1,000,000 increase in revenues during the first year, and this increase will grow by 5% each year thereafter. Hathaway’s contribution margin is 60%.
 Smaller, more-frequent purchase orders will result in a $150,000 increase in annual materials-handling costs and an $80,000 reduction in the current annual cost of renting the warehouse.
 Working-capital needs will increase by $200,000.
 At the end of five years, Hathaway expects to sell the system for $100,000.
 Hathaway is subject to an income tax rate of 30% on all taxable transactions and requires an after-tax rate of return of 12%.
Assume that all cash flows occur at year-end except for initial investment amounts.
Required:
A. If the JIT system is installed at Hathaway, calculate the expected incremental after-tax cash flow from operations during each of the five years.
B. Calculate the expected NPV of installing the JIT system at Hathaway.