Question

1. 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 9,100 units at $52 each. The new manufacturing equipment will cost $197,100 and is expected to have a 10-year life and $15,100 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		$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 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			$

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Answer 1

Cashflows: Cashflows is the movement of money in and out of the business due to its Operating, Investing and Financing Activities

Determination of Net cashflows
Particulars	Year -1	Years 2 - 9	Year 10
Initial Investment	- $197,100
Operating Cashflows
Annual Revenues	$473,200 (9100 *$52)	$473,200 (9100 *$52)	$473,200 (9100 *$52)
Selling expenses	- $23,660 ($473,200 * 5%)	- $23,660 ($473,200 * 5%)	- $23,660 ($473,200 * 5%)
Cost to manufacture	- $384,020 [(44.20 - 2)*9100	- $384,020 [(44.20 - 2)*9100	- $384,020 [(44.20 - 2)*9100
Net Operating cashflows	$65,520	$65,520	$65,520
Total of Year 1	- $131,580
Total of Years 2 - 9		$65,520
Residual Value			$15,100
Total for Last Year			$80,620

Note:

1) Calculation of Cost to Manufacture : Total cost to manufacture is $44.20 per unit. It includes Fixed Factory Overhead Depreciation of $2 per unit. Since Depreciation is a non cash expense it is deducted from the total Manufacturing cost per unit i.e $44.20 - $2 = $42.20

The Net cash flows for the first year is negative i.e $131,580 of cash outflows

The Net cash flows for the first year is positive i.e $65,520 of cash outflows

The Net cash flows for the first year is Positive i.e $80,620 of cash outflows