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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
"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 |
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