Question

Camptown Togs, Inc., a children’s clothing manufacturer, has always found payroll processing to be costly because it must be done by a clerk so that the number of piece-goods coupons received by each employee can be collected and the types of tasks performed by each employee can be calculated. Not long ago, an industrial engineer designed a system that partially automates the process by means of a scanner that reads the piece-goods coupons. Management is enthusiastic about this system because it utilizes some personal computer systems that were purchased recently. It is expected that this new automated system will save $45,000 per year in labor. The new system will cost about $30,000 to build and test prior to operation. It is expected that operating costs, including income taxes, will be about $5,000 per year. The system will have a five-year useful life. The expected net salvage value of the system is estimated to be $3,000.

(a) Identify the cash inflows over the life of the project.
(b) Identify the cash outflows over the life of the project.
(c) Determine the net cash flows over the life of the project.

Answer 1

Camptown Togs, Inc.'s new automated payroll system has cash inflows consisting of annual labor savings of $45,000 and a salvage value of $3,000. Cash outflows are the $30,000 initial cost and annual operating costs of $5,000. Net cash flows are calculated by subtracting outflows from inflows for each year, resulting in a net inflow of $40,000 annually for five years, plus the salvage value, minus the initial cost.

Step-by-step explanation:

To analyze the cash flows related to Camptown Togs, Inc.'s new automated payroll system, we consider the initial cost, annual savings, operating costs, and salvage value over its useful life of five years. Here's how we calculate each component:

Cash Inflows

• Labor savings of $45,000 per year for five years.
• Salvage value at the end of the project's life: $3,000.

Cash Outflows

• Initial cost to build and test the system: $30,000.
• Annual operating costs, including income taxes: $5,000 per year for five years.

Net Cash Flows

To determine the net cash flows, we calculate the inflows minus the outflows for each year and add the salvage value at the end of year five.

1. Year 1-5: Annual savings of $45,000 - Annual operating costs of $5,000 = $40,000 net inflow per year.
2. End of Year 5: Salvage value of $3,000.
3. Total net cash flow over 5 years = ($40,000 * 5) + $3,000 - $30,000 initial cost.

Answer 2

a. Time period Cash Inflow

Year 1 $45,000

Year 2 $45,000

Year 3 $45,000

Year 4 $45,000

Year 5 $48,000 ($45,000+$3,000)

b. Time period Cash Outflow

Year 0 $30,000

Year 1 $5,000

Year 2 $5,000

Year 3 $5,000

Year 4 $5,000

Year 5 $5,000

c. Time period Cash Inflow Cash Outflow Net Cash Flow

Year 0 $0 $30,000 -$30,000

Year 1 $45,000 $5,000 $40,000

Year 2 $45,000 $5,000 $40,000

Year 3 $45,000 $5,000 $40,000

Year 4 $45,000 $5,000 $40,000

Year 4 $48,000 $5,000 $43,000