Cornucopia Inc. is planning to invest in new manufacturing equipment to make a new garden tool.

Cornucopia 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 4,000 units at $68 each. The new manufacturing equipment will cost $107,000 and is expected to have a 10-year life and $13,000 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:

Direct labor                                         $ 9.00
Direct materials                                    36.00
Fixed factory overhead—depreciation  2.35
Variable factory overhead                     4.65
Total                                                  $52.00

Determine the net cash flows for the first year of the project, Years 2–9, and for the last year of the project.


Answer:

Year 1 Years 2–9 Last Year 
Initial investment…………………………………………  $(107,000) 
Operating cash flows: 
Annual revenues (4,000 units × 68)……………… $ 272,000 $ 272,000 $ 272,000 
Selling expenses (5% × $272,000)……………… 
Cost to manufacture 
(13,600) (13,600) (13,600) 
(4,000 units × $49.65)*……………………………   (198,600)   (198,600)   (198,600) 
Net operating cash flows…………………………… $   59,800 $   59,800 $   59,800 
Total for Year 1………………………………………… $  (47,200)   
Total for Years 2–9 (operating cash flow)…………  $   59,800  
Residual value………………………………………     13,000 
Total for last year………………………………………… $   72,800 
* The fixed overhead relates to the depreciation on the equipment. Depreciation is not a cash 
flow and should not be considered in the analysis. Thus, $9.00 + $36.00 + $4.65 = $49.65