Calculate Cash Flows Daffodil Inc. is planning to invest in manufacturing equipm

Question

Calculate Cash Flows

Daffodil Inc. is planning to invest in manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 5,100 units at $38.00 each. The new manufacturing equipment will cost $82,800, have a 10-year life, a residual value of $6,300, and will be depreciated using the straight-line method. 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:

a. 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.

b. Assume that the operating cash flows occur evenly throughout the year. Determine how many months in the future, from the date of the initial investment, it will be when the cash for the initial investment will be paid back. Round up to the nearest number of months.

Direct labor $6.50 Direct materials 21.00 Fixed factory overhead—depreciation 1.50 Variable factory overhead 3.30 Total $32.30

Explanation / Answer

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

b) Payback period = 82800/28968 = 2.86 years or 34 months

Year 1 Year 2-9 Year 10 Operating cash flows: Annual revenue 193800 193800 193800 Selling expense -7752 -7752 -7752 Cost to manufacture -157080 -157080 -157080 Net operating cash flow 28968 28968 28968 Initial investment -82800 Total for year 1 53832 Total for year 2-9 231744 Residual value 6300 Total for last year 35268

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