Question - Wood- Braun Manufacturing Corporation produces office furniture equipment and sells it wholesale to furniture distributors. Wood-Braun's management is reviewing a proposal to purchase a just-in-time inventory (JIT) system to better serve its customers. The JIT system will include a computer system and materials-handling equipment. The decision will be based on whether or not the new JIT system is cost effective to the organization for the next five years.
The computer system for both hardware and software will initially cost $1,250,000. Materials-handling equipment will cost $450,000. Both groups of equipment will have a five-year useful life for tax reporting of depreciation (straight-line). At the end of the five years, the newly acquired materials-handling equipment will be sold for $150,000. The computer system will have a zero terminal disposal price at the end of five years.
Other factors to be considered over the next five years for this proposal include the following:
Due to the service improvement resulting from this new JIT system, Wood will realize an $800,000 increase in revenues during the first year. Wood-Braun expects this initial $800,000 revenue increase to continue to grow by 10% per year thereafter.
The contribution margin is 60 percent.
Annual materials-ordering cost will increase $50,000 due to a greater level of purchase orders.
There will be a one-time decrease in working-capital investment of $150,000 at the end of the first year.
There will be a 20% savings in warehouse rent due to less space being needed. The current annual rent is $300,000.
Wood-Braun used an after-tax required rate of return of 10% and is subject to an income tax rate of 40%. Assume that all cash flows occur at year end for tax purposes except for any initial purchase amounts.
Required
Prepare an analysis of the after-tax effects for the purchase of the just-in-time system at Wood-Braun using the net present value method for evaluating capital expenditures. Be sure to show all of your computations.
Determine whether Wood-Braun should purchase the just-in-time inventory system. Explain your answer.
What nonfinancial factors you would consider in making the decision about the just-in-time system?