Question

1. 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 9,700 units at $42 each. The new manufacturing equipment will cost $168,100 and is expected to have a 10-year life and a $12,900 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		$7.10
   Direct materials		23.40
   Fixed factory overhead-depreciation		1.60
   Variable factory overhead		3.60
   	Total	$35.70

   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

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	-168100
Operating cash flows:
Annual revenues	$407400	$407400	$407400
Selling expenses	-20370	-20370	-20370
Cost to manufacture	-330770	-330770	-330770
Net operating cash flows	$56260	$56260	$56260
Total for Year 1	-111840
Total for Years 2–9 (operating cash flow)		$450080
Residual value			12900
Total for last year			$69160