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 0,000 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      
         

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