Annual savings from Project X include a reduction in ten clerical employees with
ID: 2776799 • Letter: A
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 $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 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
Explanation / Answer
a) Initial Outlay 250,000.00 b) Benfits: No lost sales 12,000.00 Salary reduction 150,000.00 No production delay 8,000.00 Reduction in utility costs 3,000.00 Total Benefits 173,000.00 Costs: Two new operator salaries 80,000.00 Operating Expenses 12,000.00 Total Costs 92,000.00 Depreciation(250000/5) 50,000.00 Income before tax= Benefits-costs-dep 31,000.00 Tax@34% 10,540.00 Income after Tax 20,460.00 Add dep 50,000.00 Cash flows after tax 70,460.00 Statemnet showing Cash flows Particulars Time PVf@12% Amount PV Cash Outflows - 1.00 (250,000.00) (250,000.00) PV of Cash outflows (250,000.00) Cash inflows 1.00 0.8929 70,460.00 62,910.71 Cash inflows 2.00 0.7972 70,460.00 56,170.28 Cash inflows 3.00 0.7118 70,460.00 50,152.04 Cash inflows 4.00 0.6355 70,460.00 44,778.60 Cash inflows 5.00 0.5674 70,460.00 39,980.90 PV of Cash Inflows 253,992.53 NPV 3,992.53 Yes it should be implemented as positive NPV
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