Calculate Cash Flows Out of Eden, Inc., is planning to invest in new manufacturi
ID: 2588058 • Letter: C
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 7,500 units at $32.00 each. The new manufacturing equipment will cost $97,500 and is expected to have a 10-year life and $7,500 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:
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 $5.40 Direct materials 17.90 Fixed factory overhead-depreciation 1.20 Variable factory overhead 2.70 Total $27.20Explanation / Answer
Out of Eden, Inc.
Net Cash Flows
Year 1
Year 2-9
Last Year
Initial Investment
(97,500)
Operating Cash Flows:
Annual revenue (7,500*32) (a)
240,000
240,000
240,000
Selling Expenses (a*4%)
(9,600)
(9,600)
(9,600)
Cost to Manufacture (7,500*26)
(195,000)
(195,000)
(195,000)
Net Operating Cash flows
35,400
35,400
35,400
Total for year 1
(26,700)
Total for year 2-9 (35,400*8)
283,200
Residual Value
7,500
Total for last year
42,900
Cost to manufacture per unit = Cost per unit Less depreciation = 27.2 - 1.2 = $26
Total for first year = Net Operating Cash flows for year 1 - Initial investment
Total for last year = Net Operating Cash flows for last year + Residual value
Out of Eden, Inc.
Net Cash Flows
Year 1
Year 2-9
Last Year
Initial Investment
(97,500)
Operating Cash Flows:
Annual revenue (7,500*32) (a)
240,000
240,000
240,000
Selling Expenses (a*4%)
(9,600)
(9,600)
(9,600)
Cost to Manufacture (7,500*26)
(195,000)
(195,000)
(195,000)
Net Operating Cash flows
35,400
35,400
35,400
Total for year 1
(26,700)
Total for year 2-9 (35,400*8)
283,200
Residual Value
7,500
Total for last year
42,900
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