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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%
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