Question

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 9,000 units at $42 each. The new manufacturing equipment will cost $156,000 and it is expected to have a 10-year life and $12,000 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 pre-unit basis:

Direct Labor $7.00
Direct Materials 23.40
Fixed factor overhead-depreciation 1.60
Variable factor overhead 3.60
Total 35.60

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

Answer 1

Consider the following calculations

Step-by-step explanation:

Year 1 Years 2–9 Last Year

Initial investment......................... $(156,000)

Operating cash flows:

Annual revenues (9,000 units × $42).... $ 378,000 $ 378,000 $ 378,000

Selling expenses (5% × $378,000)........(18,900) (18,900) (18,900)

Cost to manufacture

(9,000 units × $34.00)* ................... (306,000) (306,000) (306,000 )

Net operating cash flows .................. $ 53,100 $ 53,100 $ 53,100

Total for Year 1................................ $(102,900)

Total for Years 2–9 (operating cash flow)..... $ 53,100

Residual value............................................ 12,000

Total for last year............................................ $ 65,100

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the unit manufacturing cost = $7 + $23.4 + $3.6 = $34