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 5,000 units at $18 each. The new manufacturing equipment will cost $120,000 and is expected to have a 10-year life and a $17,000 residual value. Selling expenses related to the new product are expected to be 3% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis:

   Direct labor	$ 2.50
   Direct materials	3.20
   Fixed factory overhead—depreciation	2.40
   Variable factory overhead	0.90
   Total	$9.00

   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			$

   Feedback

   For Year 1, subtract the amount to be invested from the operating cash flows (annual revenues less selling expenses less cost to manufacture). For Years 2-10, subtract the selling expenses and the costs to manufacture from the annual revenues. For Year 10 only, add the residual value.

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Answer 1

Nature's way Inc.
Net Cash Flows
	Year 1	Year 2 - 9	Last Year
Initial Investment	$       -1,20,000
Operating cash flows:
Annual revenues (5000 X $18)	$             90,000	$           90,000	$           90,000
Selling expenses (Sales Revenue X 3%)	$             -2,700	$           -2,700	$           -2,700
Cost to manufacture [8600 X ($9 - 2.4)]	$           -33,000	$         -33,000	$         -33,000
Net operating cash flows	$             54,300	$           54,300	$           54,300
Total for Year 1	$           -65,700
Total for Year 2 - 9		$           54,300
Residual Value			$           17,000
Total for last year			$           71,300