High School

Determine the net cash flows for Kauai Tools Inc. as it invests in new manufacturing equipment to produce a new garden tool.

**Project Overview:**
- **Additional Annual Sales:** 20,000 units at $10 each
- **Manufacturing Equipment Cost:** $150,000
- **Equipment Life:** 10 years
- **Residual Value:** $30,000
- **Selling Expenses:** 2% of sales revenue

**Cost to Manufacture (per unit):**
- Direct labor: $2.75
- Direct materials: $1.80
- Fixed factory overhead (depreciation): $0.60
- Variable factory overhead: $1.15
- Total Manufacturing Cost per unit: $6.30

**Cash Flow Analysis:**

1. **Initial Investment:**
- Equipment Cost: $150,000

2. **Operating Cash Flows:**
- **Annual Revenues:** 20,000 units x $10 = $200,000
- **Selling Expenses:** 2% of $200,000 = $4,000
- **Manufacturing Costs:** 20,000 units x $6.30 = $126,000
- **Net Operating Cash Flows (Year 1):** $200,000 - $4,000 - $126,000 = $70,000

3. **Net Operating Cash Flows (Years 2–9):**
- **Annual Operating Cash Flow:** $70,000 (same as Year 1)

4. **Last Year Cash Flows:**
- **Residual Value:** $30,000
- **Net Operating Cash Flow for Last Year:** $70,000 + $30,000 = $100,000

**Summary of Net Cash Flows:**
- **Year 1 Total:** Initial investment ($150,000) + Operating cash flow ($70,000) = Net cash flow for Year 1
- **Years 2–9 Total (per year):** $70,000
- **Last Year Total:** $100,000

**Instructions:** Use the minus sign to indicate cash outflows. Do not round your intermediate calculations but, if required, round your final answers to the nearest dollar.

Answer :

Determine cash flows Kauai Tools Inc. is planning to invest in new manufacturing equipment to make a new garden tool. Let's find the net cash flows for the first year of the project, Years 2–9, and for the last year of the project.

Given that,

Additional annual sales: 20,000 units at $10 each

Manufacturing equipment cost: $150,000

Equipment life: 10 years

Equipment residual value: $30,000

Selling expenses: 2% of sales revenue

Cost to manufacture per unit: $6.30

Initial Investment (Year 0):

Initial investment = Equipment cost

Initial investment = $150,000

Net Cash Flows for the First Year (Year 1):

Cash inflow (Revenue) = Additional annual sales * Selling price

Cash inflow (Revenue) = 20,000 * $10

Cash inflow (Revenue) = $200,000

Cash outflow (Selling expenses) = Revenue * Selling expenses rate

Cash outflow (Selling expenses) = $200,000 * 2% = $4,000

Cash outflow (Cost to manufacture) = Additional annual sales * Cost to manufacture per unit

Cash outflow (Cost to manufacture) = 20,000 * $6.30 = $126,000

Net operating cash flows (Year 1) = Cash inflow - Cash outflows

Net operating cash flows (Year 1) = $200,000 - ($4,000 + $126,000) = $70,000

Net Cash Flows for Years 2–9 (Operating Cash Flow):

For Years 2–9, the net operating cash flows will be the same as Year 1 since there are no changes in revenues or expenses.

Net operating cash flows (Years 2–9) = $70,000

Net Cash Flow for the Last Year (Year 10):

In the last year (Year 10), the equipment will be sold for its residual value.

Net cash flow (Last Year) = Equipment residual value

Net cash flow (Last Year) = $30,000

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