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 7,400 units at $52 each. The new manufacturing equipment will cost $160,300 and is expected to have a 10-year life and a $12,300 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 $8.80 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 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 $

2

Net Present Value—Unequal Lives

Project 1 requires an original investment of $125,000. The project will yield cash flows of $50,000 per year for 10 years. Project 2 has a computed net present value of $135,000 over an eight-year life. Project 1 could be sold at the end of eight years for a price of $8,000.

Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below.

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

a. Determine the net present value of Project 1 over an eight-year life, with residual value, assuming a minimum rate of return of 12%. If required, round to the nearest dollar.

b. Which project provides the greatest net present value?

3 Net present value method -The following data are accumulated by Geddes Company in evaluating the purchase of $140,000 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$45,000		$80,000
Year 2	21,000		56,000
Year 3	10,500		45,500
Year 4	4,500		39,500

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

1. Assuming that the desired rate of return is 10%, determine the net present value for the proposal. If required, round to the nearest dollar.

   Net present value

   $

2. Would management be likely to look with favor on the proposal?

   , the net present value indicates that the return on the proposal is   than the minimum desired rate of return of 10%.

Answer 1

1]

Operating cash flow = revenues - total costs + depreciation

net cash flow in year 0 = -initial cost

net cash flow in years 1 to 9 = OCF

net cash flow in year 10 = OCF + residual value

The calculations are above

The calculations are above