2 M Determine the value of M that will make the 2 cash flows equivalent at i-4%
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Calculate Cash Flows
Daffodil Inc. is planning to invest in manufacturing equipmentto make a new garden tool. The new garden tool is expected togenerate additional annual sales of 120,000 units at $9 each. Thenew manufacturing equipment will cost $320,000, have a 10-yearlife, a residual value of $20,000, and will be depreciated usingthe straight-line method. Selling expenses related to the newproduct are expected to be 15% of sales revenue. The cost tomanufacture the product includes the following on a per-unitbasis:
Direct labor | $1.00 | |
Direct materials | 3.40 | |
Fixed factory overheadâdepreciation | 0.25 | |
Variable factory overhead | 0.35 | |
Total | $5.00 |
a. Determine the net cash flows for the firstyear of the project, Years 2â9, and for the last year of theproject.
Use the minus sign to indicate cash outflows.
Year 1 | Years 2 - 9 | Last Year | |||
Operating cash flows: | |||||
Annual revenues | $ | $ | $ | ||
Selling expenses | |||||
Cost to manufacture | |||||
Net operating cash flows | $ | $ | $ | ||
Initial investment | $ | ||||
Total for year 1 | $ | ||||
Total for years 2-9 | $ | ||||
Residual value | |||||
Total for last year | $ |
b. Assume that the operating cash flows occurevenly throughout the year and that the equipment is purchased onJanuary 1, 20Y1. Determine when the cash payback will occur byyear, month, and day.
Calculate Cash Flows
Out of Eden, 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 8,600 units at $48.00 each. The new manufacturing equipment will cost $167,600 and is expected to have a 10-year life and $12,800 residual value. Selling expenses related to the new product are expected to be 4% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis:
Direct labor | $8.20 | |
Direct materials | 26.70 | |
Fixed factory overhead-depreciation | 1.80 | |
Variable factory overhead | 4.10 | |
Total | $40.80 |
Determine the net cash flows for the first year of the project, Years 2â9, and for the last year of the project. Use the minus sign to indicate cash outflows. Do not round your intermediate calculations but, if required, round your final answer to the nearest dollar.
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