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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