Question

Calculate Cash Flows

Nature’s Way Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 7,500 units at $52 each. The new manufacturing equipment will cost $162,500 and is expected to have a 10-year life and $12,500 residual value. Selling expenses related to the new product are expected to be 5% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis:

Direct labor		$8.80
Direct materials		28.90
Fixed factory overhead-depreciation		2.00
Variable factory overhead		4.50
	Total	$44.20

Determine the net cash flows for the first year of the project, Years 2–9, and for the last year of the project. Use the minus sign to indicate cash outflows. Do not round your intermediate calculations but, if required, round your final answer to the nearest dollar.

Out of Eden, Inc.
Net Cash Flows
	Year 1	Years 2-9	Last Year
Initial investment	$______
Operating cash flows:
Annual revenues	$____	$______	$______
Selling expenses
Cost to manufacture
Net operating cash flows	$____	$______	$______
Total for Year 1	$_____
Total for Years 2-9		$_____
Residual value
Total for last year			$______

Answer 1

Determine the net cash flows for the first year of the project, Years 2–9, and for the last year of the project.

	Year 1	Year 2-9	Year 10
Initial investment	-162500
Operating cash flows:
Annual revenues	390000	390000	390000
Selling expenses	-19500	-19500	-19500
Cost to manufacture	-316500	-316500	-316500
Net operating cash flows	54000	54000	54000
Total for Year 1	-108500
Total for Year 2-9		432000
Residual value			12500
Total for last year			66500