Nature\'s Way Inc. is planning to invest in new manufacturing equipment to make

Question

Nature's Way 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 2,500 units at $60 each. The new manufacturing equipment will cost $227,000 and is expected to have a 10-year life and $17,000 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 per-unit basis: Determine the net cash flows for the first year of the project, Years 2-9, and for the last year of the project.

Explanation / Answer

Year 1 Year 2-9 Last year Cash Outflow        -2,27,000 Cash Inflow Sales (2500 X 60)          1,50,000        1,50,000        1,50,000 Variable Cost (net of Dep)            -84,000          -84,000          -84,000 ($ 42.00- $ 8.40) X 2500 Selling Exp              -7,500             -7,500             -7,500 (5% of Sales) Net Cash Inflow              58,500            58,500            58,500 Sale of Machinery            17,000 Cash Flow        -1,68,500            58,500            75,500

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