Question

Determine Cash Flows 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 8,000 units at $54 each. The new manufacturing equipment will cost $181,900 and is expected to have a 10-year life and a $13,900 residual value. Selling expenses related to the new product are expected to be 4% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis: Direct labor $9.20 Direct materials 30.00 Fixed factory overhead-depreciation 2.10 Variable factory overhead 4.60 Total $45.90 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 $ 432,000 $ $ Selling expenses 17,280 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

cash flows are the changes in cash that occurs during a period.

	Year 1	Year 2-9	last year
Initial investments	-$181,900
Operating cash flows
Annual revenue [$54*8,000]	$432,000	$432,000	$432,000
Selling expense [$432,000*4%]	-$17,280	-$17,280	-$17,280
cost to manufacture*	-$350,400[$9.20+$30+$4.60]*8000	-$350,400	-$350,400
Net operating cash flow	$64,320[$432,000-17,280-350,400]	$64,320	$64,320
Total for year 1	-$117,580[-$181,900-64,320]
Year 2-9		$64,320
Residual value			$13,900
Total for last year			$78,220 [$13,900+64,320]

Do not consider depreciation as it does not result into cash flow.

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