Cost-cutting Proposal
Ruler Industry is considering a 4-year project with an initial cost for fixed assets of $618,000. The project will have to occupy a plant the company bought 10 years ago at the price of $100,000. Today, the estimated market value of the plant is $150,000. And the company projects the market value of the plant will stay the same over the next 4 years. The project will reduce operating costs by $265,000 a year. The equipment will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the equipment will be sold for an estimated $40,000. The tax rate is 34 percent. The project will require $23,000 in extra inventory over the project’s life. Assume the discount rate is 14 percent.
1. What is the after-tax salvage cash flow from the sales of the fixed assets at the end of the project?
2. What is the annual increase in operating cash under this cost-cutting proposal?