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 7,300 units at $52 each. The new manufacturing equipment will cost $158,100 and is expected to have a 10-year life and a $12,100 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		$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

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	-$158100
Operating cash flows:
Annual revenues	$379600	$379600	$379600
Selling expenses	-15184	-15184	-15184
Cost to manufacture	-308060	-308060	-308060
Net operating cash flows	$56356	$56356	$56356
Total for Year 1	-101744
Total for Years 2–9 (operating cash flow)		$450848
Residual value			12100
Total for last year			$68456