Western Industries is evaluating the implementation of a just in time inventory system (JIT). At present time, the company uses a traditional inventory approach, carrying an average inventory of $500,000 in inventory. With JIT they will carry no or minimal inventory. The company requires a 14% return on investment. The company has estimated the following savings and costs if a JIT system is implemented:

1. Ordering costs currently the company averages 2 orders per month for $150 per order.With JIT the company estimates the number of orders will double with the cost per order remaining the same.

2. Under the current system the company normally incurs $25,000 in defective units. The company estimates they can reduce this by 80% by spending an additional $7,000 in training on an annual basis.

3. With JIT, the company is expecting 5% in lost sales due to stockout. The company currently sells 25,000 units annually at selling price of $160 per unit. Cost of goods sold include variable costs of $110 per unit.

4. Annual insurance and property taxes would decline by 40%, the company is currently paying $30,000 per year.

5. With JIT, the company will not need the warehouse. The company plans to rent the entire 20,000 square feet of the warehouse for $1.30 per square foot.

To successfully implement JIT, the company will need to replace existing equipment to make the production process more efficient. The new equipment would cost $150,000, would last 6 years, and would have a salvage value of $36,000. The company would have to pay $20,000 to have the new equipment installed. The company has a tax rate of 30%. Equipment for tax purposes is depreciated at a rate of 20%.

Required : You have been asked to determine the annual savings the company could expect with a JIT inventory system. If implementing a JIT system is favourable, the company will purchase the equipment. If that is the case, determine the net present value (NPV) of the equipment