The F Inc.s materials manager is considering the installation of a just-in-time (JIT) inventory system for L-20, one of the chemicals used in the production process. Currently, the chemical is purchased for $30 each pound. The firm uses 4,800 pounds L-20 per year. The controller estimates that it costs $150 to place and receive a typical order of L-20. The annual cost of storing L-20 is $1 per pound. F Inc.s manufacturing engineering team identifies the following effects of adopting a JIT inventory system:

1. 1) F Inc. will order 100 pounds L-20 each time.

2. 2) The cost of placing an order for L-20 will be reduced to $20.

3. 3) Suppliers would add $4 to the price per pound for frequent deliveries.

4) Currently there is a defect-assessment cost of $120,000 per year. This cost is

expected a reduction of 20% under the JIT system.

F Inc. requires a 10% annual rate of return on investment

Required:

a) From a financial perspective, determine whether it is in the best interest of F Inc. to install the JIT system. Show your calculations.