Calculate Cash Flows

Daffodil Inc. is planning to invest in manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 120,000 units at $9 each. The new manufacturing equipment will cost $320,000, have a 10-year life, a residual value of $20,000, and will be depreciated using the straight-line method. Selling expenses related to the new product are expected to be 15% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis:

Direct labor		$1.00
Direct materials		3.40
Fixed factory overheaddepreciation		0.25
Variable factory overhead		0.35
	Total	$5.00

a. Determine the net cash flows for the first year of the project, Years 29, and for the last year of the project.

Use the minus sign to indicate cash outflows.

Year 1 Years 2 - 9 Last Year Operating cash flows: Annual revenues 1,080,000 1,080,000 1,080,000 Selling expenses 162,000 x 162,000 X 162,000 x Cost to manufacture 570,000 x 570,000 x 570,000 x Net operating cash flows 570,000 x 570,000 x 570,000 x Initial investment 320,000 X Total for year 1 28,000 Total for years 2-9 348,000 Residual value 20,000 Total for last year 368,000 b. Assume that the operating cash flows occur evenly throughout the year and that the equipment is purchased on January 1, 20Y1. Determine when the cash payback 1, and day. December 1, 20Y1 9x December 2, 2011 December 4, 20Y1 December 1, 20Y2 Provou Mort