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 6,600 units at $48 each. The new manufacturing equipment will cost $128,700 and is expected to have a 10-year life and a $9,900 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		$8.20
   Direct materials		26.70
   Fixed factory overhead-depreciation		1.80
   Variable factory overhead		4.10
   	Total	$40.80

   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

Net Cash Flows
	Year 1	Year 2 - 9	Last Year
Initial Investment	$       -1,28,700
Operating cash flows:
Annual revenues (6600 X $48)	$         3,16,800	$       3,16,800	$       3,16,800
Selling expenses (Sales Revenue X 4%)	$           -12,672	$         -12,672	$         -12,672
Cost to manufacture [6600 X ($40.8 - 1.80)]	$       -2,57,400	$     -2,57,400	$     -2,57,400
Net operating cash flows	$             46,728	$           46,728	$           46,728
Total for Year 1	$           -81,972
Total for Year 2 - 9		$           46,728
Residual Value			$             9,900
Total for last year			$           56,628

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