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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

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 $9each. The new manufacturing equipment will cost $320,000, have a 10-year life, a residualvalue of $20,000, and will be depreciated using the straight-line method. Selling expensesrelated 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

a. Determine the net cash flows for the first year of the project, Years 2—9, and for the lastyear of the project.

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 will occur byyear, month, and day.

To determine

(a)

Concept Introduction:

Cash flow statement is an important part of the financial statement. Cash flow balance equals to the net cash, i.e.,the difference between the cash inflow and outflow.

To calculate:

The annual net cash flows for the first year, year 29, and last year.

Explanation

Total Turnover of the company on selling 120,000 unit:

  Turnover=120,000×$9=$1,080,000

Selling expenses expected to be 15% of revenue i.e.

  Selling expenses=$1,080,000×15%=$162,000

Other manufacturing expense excluding depreciation is:

  Other expenses=120,000×$4.75=$570,000

So, the net cash flow statement is as under:

(amount in $)

    ParticularsAmount
    Year
      1
    Year
      29
    Last year
    Annual Sales Revenue  1,080,000  1,080,000  1,080,000
To determine

(b)

Concept Introduction:

The payback period is the time which is required to recover the initial cost of an investment. It ismostly used in capital budgeting.

To calculate:

The payback period for the equipment.

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