Question

Calculate Cash Flows

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 8,700 units at $34 each. The new manufacturing equipment will cost $122,500 and is expected to have a 10-year life and $9,400 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		$5.80
Direct materials		18.90
Fixed factory overhead-depreciation		1.30
Variable factory overhead		2.90
	Total	$28.90

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 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

Nature's way Inc.
Net Cash Flows
	Year 1	Year 2 - 9	Last Year
Initial Investment	$       -1,22,500
Operating cash flows:
Annual revenues (8700 X $34)	$         2,95,800	$       2,95,800	$       2,95,800
Selling expenses (Sales Revenue X 5%)	$           -14,790	$         -14,790	$         -14,790
Cost to manufacture [8700 X ($28.90 - 1.30)]	$       -2,40,120	$     -2,40,120	$     -2,40,120
Net operating cash flows	$             40,890	$           40,890	$           40,890
Total for Year 1	$           -81,610
Total for Year 2 - 9		$           40,890
Residual Value			$             9,400
Total for last year			$           50,290