Reference no: EM132557410

BCB Company is a manufacturer of pumps. Recently, it has successful designed a new oil pump PART XT to be used by large trucks, that will be more efficient with few failures than existing oil pumps in the market. The machine to manufacture PART XT will cost Ksh 80,000,000 and will have a useful life of 5 years. It will be depreciated using straight line to zero salvage value. Initial working capital is projected at Ksh 600,000 Sales volume in the first year of production is projected at 50,000 units and will increase at 8% p.a. Introductory selling price in the first year is set at Ksh 700 per unit and will be increased annually by Ksh 250. The fixed cost of production in the first year is expected to be Ksh 4,000,000 reducing at 2% per annum while variable cost per unit will remain fairly constant at Ksh 450. The machine will require some parts replacement at a cost of Ksh 900,000 at the end of third year of use. The working capital is to be maintained at 10% of annual sales each year. Selling expense is partly fixed at Ksh 50,000 per year and partly variable at 2.5% of annual sales. A company that participated in designing PART XT is paid a royalty of 2% of annual sales. However, the amount is paid in arrears e.g. royalties earned in 2010 are payable in 2011. Royalties are treated as expense in the year they are paid. The company pays taxes at 30% and costs of replacements are treated as capital expenditures.

Required. Compute the net annual cash flows generated in the third year of operating machines