Identifying Cash Inflows and Outflows
5.1 Camptown Togs, Togs, a children’s clothing manufacture, has always found payroll
processing to be costly, because it must be done by a clerk so that the number of piece-goods
coupons collected for each employee can be collected, and the types of tasks performed by
each employee can be calculated.
Recently, however, an industrial engineer has designed a
system that partially automates the process by means of a scanner that reads the piece-goods
coupons. Management is enthusiastic about this system because it uses some personal
computer systems that were purchased recently.
It is expected that this new automated system will save $40,000 per year in labor.
system will cost about $30,000 to build and test prior to operation.
It is expected that
operating costs will be about $15,000 per year.
The system will have a five-year useful life.
The expected net salvage value of the system is estimated to be $3,000.
(a) Identify the cash inflows over the life of the project.
(b) Identify the cash outflows over the life of the project.
(c) Determine the net cash flows over the life of the project.
(a) Cash inflows: (1) savings in labour, $40,000 per year,
(2) Salvage value, $3,000 at year 5.
(b) Cash outflows: (1) capital expenditure = $30,000 at year 0,
(2) Operating costs = $15,000 per year.
Estimating project cash flows: