Question

Calculate Cash Flows

Nature’s Way Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The garden tool is expected to generate additional annual sales of 8,800 units at $48 each. The new manufacturing equipment will cost $171,500 and is expected to have a 10-year life and $13,100 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		$8.2
Direct materials		26.7
Fixed factory overhead-depreciation		1.8
Variable factory overhead		4.1
	Total	$40.8

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.

Nature’s Way 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 Way Inc
Items	Year 1	Year 2-9	Last Year
Initial Investment (A)	-$1,71,500
Operating Cash Flows
Annual Revenues   (B) Annual Sales qty x SP/unit	$4,22,400	$33,79,200	$4,22,400
Selling expense (C ) (4% of Sales revenue)	$16,896	$1,35,168	$16,896
Cost of manufacture (D) (Annual Sales qty x Total cost of manufacture)	$3,59,040	$28,72,320	$3,59,040
Net Operating Cash Flows :
Total Year 1 A -[ B -(C+D) ]	-$1,25,036
Total Year 2 [ B -(C+D) ]		$3,71,712
Residual Value (E)			$13,100
Total Last Year [ B -(C+D) ]+E			$59,564
Annual Sales Qty (A)	8800	70400	8800
Selling Price per unit (B)	48	48	48
Cost of Manufacture :
Direct Labour	8.2	8.2	8.2
Direct Material	26.7	26.7	26.7
Fixed Factory OH	1.8	1.8	1.8
Variable Factory OH	4.1	4.1	4.1
Total Cost of manufacture (C )	40.8	40.8	40.8