An investment (equipment) costs $217,000 cash in its first year of operation and it is expected to have a residual value of $20,000 at the end of its four-year useful life. The equipment produces a product that is expected to generate annual sales of 3,500 units at a price of $50 per unit. The product’s manufacturing cost per unit is $42.00 including $8.40 per unit for factory depreciation.
a) Calculate this investment’s net annual cash flow for its first year of operation. b) Calculate this investment’s net annual cash flow for its fourth (final) year of operation.
a) Calculate net annual Cash flow for its first year of operation
| Revenue (3500*50) | 175000 |
| Cost (42-8.4)*3500 | -117600 |
| Net income | 57400 |
| Less: Initial investment | -217000 |
| Net annual Cash flow for its first year of operation | -159600 |
b) Calculate net annual Cash flow for its fourth year of operation
| Revenue (3500*50) | 175000 |
| Cost (42-8.4)*3500 | -117600 |
| Net income | 57400 |
| Add: Residual value | 20000 |
| Net annual Cash flow for its fourth year of operation | 77400 |
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