Calculate Cash Flows Out of Eden, Inc., is planning to invest in new manufacturi

Question

Calculate Cash Flows

Out of Eden, 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 6,700 units at $46.00 each. The new manufacturing equipment will cost $130,600 and is expected to have a 10-year life and $10,000 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.

Out of Eden, 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

$  

Direct labor $7.80 Direct materials 25.60 Fixed factory overhead-depreciation 1.80 Variable factory overhead 3.90 Total $39.10

Explanation / Answer

Annual Revenues each year: Number of units sold 6700 units Selling price per unit $ 46 per unit Annual Sales Revenue (6700 units@46) = $ 308,200 Selling Expense each year: Selling expense =5% of sales revenue Annual selling expense (308,200*5%) = $ 15,410 Cost to manufacture (Cash cost): Direct Labour (6700 units@ 7.80) 52260 Direct Material (6700 units@ 25.60) 171520 Variable factory Overheads(6700 units@ 3.90) 26130 Total Cash operating cost Annual 249910 Note: Depreciation is not part of cash cost as no cash payment is incurred on such expense. STATEMENT SHOWING NET CASHFLOWS FOR EACH YEAR OUT OF EDEN INC YEAR 1 YEAR 2-9 LAST YEAR In $ In $ in $ Initial Investment -130600 Operating Cashflows: Annual Revenue 308200 308200 308200 Selling Expense -15410 -15410 -15410 Cost to manufacture -249910 -249910 -249910 Net Operating Cash flows 42880 42880 42880 Total for Year1 -173480 Totals for Year 2-9(42880*8) 343040 Residual Value 10000 Total For Last Year 52880

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