Your corporation is thinking to automate its production. The automation system is going to cost $500, 000. It will be used in a 5-year project, but its depreciation schedule is over three years. In particular, depreciation allowance is 50% in year 1, 30% in year 2 and 20% in year 3. You expect the market salvage value to be $50, 000 at the end of year 5. The required initial increase in working capital (in year 1) is $40,000. Suppose that tax rate is 20%, and the required cost of capital is 15%.

(a) What level of annual pretax cost savings should the automation project generate in order to be financially attractive?

(b) Conduct sensitivity analysis of your result with respect to the pretax cost saving. In particular, compute how NPV will change if you decrease it by 5%? increase by 10%?