Question

Calculate Cash Flows

Daffodil Inc. is planning to invest in manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 9,700 units at $36.00 each. The new manufacturing equipment will cost $147,100, have a 10-year life, a residual value of $11,300, and will be depreciated using the straight-line method. 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		$6.10
Direct materials		20.00
Fixed factory overhead—depreciation		1.40
Variable factory overhead		3.10
	Total	$30.60

a. 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.

			Year 1	Years 2 - 9	Last Year
Operating cash flows:
	Annual revenues		$	$	$
	Selling expenses
	Cost to manufacture
		Net operating cash flows	$	$	$
Initial investment			$
Total for year 1			$
Total for years 2-9				$
	Residual value
Total for last year					$

b. Assume that the operating cash flows occur evenly throughout the year. Determine how many months in the future, from the date of the initial investment, it will be when the cash for the initial investment will be paid back. Round up to the nearest number of months.

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Answer 1

Solution a:

Daffodil Inc.
Net Cash Flows
Particulars	Year 1	Years 2-9	Last Year
Initial investment	-$147,100.00
Operating cash flows:
Annual revenues	$349,200.00	$349,200.00	$349,200.00
Selling Expenses	-$17,460.00	-$17,460.00	-$17,460.00
Cost to manufacture	-$283,240.00	-$283,240.00	-$283,240.00
Net Operating cash flows	$48,500.00	$48,500.00	$48,500.00
Total for year 1	-$98,600.00
Total for Years 2 to 9		$48,500.00
Residual Value			$11,300.00
Total for last year			$59,800.00

Solution b:

Payback period = Initial investment / Annual cash inflows = $147,100 / $48,500 = 3.03 years