Question: Daffodil Inc is planning to invest in new manufacturing equipment

Daffodil 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 120,000 units at $9 each. The new manufacturing equipment will cost $320,000, have a 10-year life, have 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 overhead—depreciation . 1.25
Variable factory overhead ...... 0.35
Total ............... $6.00

a. Determine the net cash flows for the first year of the project, Years 2–9, and for the last year of the project.
b. Assume that the operating cash flows occur evenly throughout the year and that the equipment is purchased on January 1, 2013. Determine when the cash payback will occur by year, month, and day.

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  • CreatedFebruary 04, 2014
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