Question

Calculate Cash Flows

Nature’s Way Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The garden tool is expected to generate additional annual sales of 6,000 units at $54 each. The new manufacturing equipment will cost $136,500 and is expected to have a 10-year life and $10,500 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		$9.2
Direct materials		30
Fixed factory overhead-depreciation		2.1
Variable factory overhead		4.6
	Total	$45.9

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.

Nature’s Way 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. 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.

Nature’s Way Inc.
Net Cash Flows
	Year 1	Years 2-9	Last Year
Initial investment	-136500
Operating cash flows:
Annual revenues	$324000	$324000	$324000
Selling expenses	-16200	-16200	-16200
Cost to manufacture	-262800	-262800	-262800
Net operating cash flows	$45000	$45000	$45000
Total for Year 1	-91500
Total for Years 2-9		$360000
Residual value			10500
Total for last year			$55500