| 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 |
student1312
20140425012050fn2640_project__1_.xlsx
