Question

Natural Foods 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 7,600 units at $52 each. The new manufacturing equipment will cost $164,600 and is expected to have a 10-year life and a $12,600 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 answers to the nearest dollar.

Natural Foods 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 (operating cash flow)		$
Residual value
Total for last year			$

Answer 1

Natural Foods Inc.
Net Cash Flows
	Year 1	Years 2-9	Last Year
Initial investment	(164,600)
Operating cash flows:
Annual revenues (7600 X52)	395,200	395,200	395,200
Selling expenses 5%	(19,760)	(19,760)	(19,760)
Cost to manufacture (7600X(44.20-2.00) (net of Depreciation)	(320,720)	(320,720)	(320,720)
Net operating cash flows	54,720	54,720	54,720
Total for Year 1	(109,880)
Total for Years 2-9		54,720
Residual value			12,600
Total for last year			67,320