Question

Nature’s Way 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 8,300 units at $44 each. The new manufacturing equipment will cost $152,800 and is expected to have a 10-year life and $11,700 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		$7.50
Direct materials		24.40
Fixed factory overhead-depreciation		1.70
Variable factory overhead		3.80
	Total	$37.40

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.

Out of Eden, 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

	Year 1	Years 2-9	Last Year
Initial investment	-$1,52,800
Operating cash flows:
Annual revenues (8,300 units * $44 per unit)	$3,65,200	$3,65,200	$3,65,200
Selling expenses (Annual revenues * 4%) ($3,65,200 *4%)	-$14,608	-$14,608	-$14,608
Cost to manufacture (Fixed cost not to be considered) ($37.4 - $1.7) * 8300 units	-$2,96,310	-$2,96,310	-$2,96,310
Net operating cash flows	$ 54,282	$ 54,282	$ 54,282
Total for Year 1 (Net operating cash flow Less Initial Investment)	-$98,518
Total for Years 2-9		$ 54,282
Residual value			$ 11,700
Total for last year (Net operating cash flow add Residual Value)			$ 65,982