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Question:
Annual savings from Project X include a reduction in ten clerical employees with annual salaries of $15,000 each, $8,000 from reduced production delays, $12,000 from lost sales due to inventory stock-outs, and $3,000 in reduced utility costs. Project X costs $250,000 and will be depreciated over a five-year period using straight-line depreciation. Incremental expenses of the system include two new operators with annual salaries of $40,000 each and operating expenses of $12,000 per year. The firm tax rate is 34 percent.

a.	Find Project X's initial cash outlay.

b.	Find the project's operating cash flows over the five-year period.
	Cash Flow:

	Benefits:
	Sales increase:	Reduced lost sales from stockouts
	cost reduction:	Salary reduction
		Reduced production delay
		Reduction in utility cost

	Change in earnings before depreciation:
		change in sales + cost reductions
	Depreciation expense

	Benefits from the project:
		change in sales + cost reductions
	- depreciation

	Costs increases:
		Annual salary
		Operating expense
		Increase in costs

	Earnings before taxes: (benefits less cost increases)
	Less: taxes
	Earnings after taxes

	Annual cash flows = net income + depreciation =

c.	If the project's required return is 12%, should it be implemented?
			PV at
	Year	Cash flow	12%
	0
	1
	2
	3
	4
	5

12 years ago
27.04.2014
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