Calculate Cash Flows Nature’s Way Inc. is planning to invest in new manufacturin

Question

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 7,500 units at $52 each. The new manufacturing equipment will cost $162,500 and is expected to have a 10-year life and $12,500 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:

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.

Direct labor $8.80 Direct materials 28.90 Fixed factory overhead-depreciation 2.00 Variable factory overhead 4.50 Total $44.20

Explanation / Answer

Determine the net cash flows for the first year of the project, Years 2–9, and for the last year of the project.

Year 1 Year 2-9 Year 10 Initial investment -162500 Operating cash flows: Annual revenues 390000 390000 390000 Selling expenses -19500 -19500 -19500 Cost to manufacture -316500 -316500 -316500 Net operating cash flows 54000 54000 54000 Total for Year 1 -108500 Total for Year 2-9 432000 Residual value 12500 Total for last year 66500

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