Annual savings from Project X include a reduction of 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 firms tax rate is 34 percent.

a. Find Project Xs initial cash outlay.

b. Find the projects operating cash flows over the five-year period.

Cash Flow:

Benefits: Sale Increase: Reduced lost sales from stockouts Cost reduction: Salary reduction delay Reduced production delay Reduction in utility cost

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

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

Cost increases: Annual salary operating expense Increase in costs

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

Annual cash flows=net+depreciation=

C.If the project's required return is 12%, should it be implemented?

Year Cash flow PV at 12% 0 1 2 3 4 5