Annual savings from Project X include a reduction of ten clerical employees with

Question

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. Task 3: Did you find the initial cash outlay of Project X? Did you find the project’s operating cash flows over the five - year period? Did you evaluate whether the operating cash flows should be implemented if the project’s requirement is 12 percent? FN2640 Project 4 Description/ Requirements of Project Evaluation Criteria a. Find Project X’s initial cash outlay. b. Find the project’s operating cash flows over the five - year period. c. I f the project’s required return is 12 percent, should it be implemented

Explanation / Answer

Time line 0 1 2 3 4 5 Cost of Project X -250000 =Initial Investment outlay -250000 SAVINGs: Annual salaries 10*15000= 150000 150000 150000 150000 150000 Reduced production delays 8000 8000 8000 8000 8000 Lost sales due to inventory stock out 12000 12000 12000 12000 12000 Reduced utility cost 3000 3000 3000 3000 3000 Total savings(S)= 173000 173000 173000 173000 173000 Incremental expenses Salary 2*40000= 80000 80000 80000 80000 80000 Operating expenses 12000 12000 12000 12000 12000 Total incremental expenses[E} 92000 92000 92000 92000 92000 -Depreciation Cost of new machine/5 -50000 -50000 -50000 -50000 -50000 =Pretax cash flows =S - E - Depreciation 31000 31000 31000 31000 31000 -taxes =(Pretax cash flows)*(1-tax) 20460 20460 20460 20460 20460 +Depreciation 50000 50000 50000 50000 50000 =after tax operating cash flow 70460 70460 70460 70460 70460 Total Cash flow for the period -250000 70460 70460 70460 70460 70460 Required rate of return= 12% Discount factor= (1+ required rate)^N 1 1.12 1.2544 1.404928 1.573519 1.762342 Discounted cash flow= total cash flow/discount factor -250000 62910.71429 56170.28061 50152.04 44778.6 39980.9 NPV= Sum of discounted cash flow = 3992.531217

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.