Matheson Electronics has just developed a new electronic deviceit believes will have broad market appeal. The company hasperformed marketing and cost studies that revealed the followinginformation:
- New equipment would have to be acquired to produce the device.The equipment would cost $315,000 and have a six-year useful life.After six years, it would have a salvage value of about$15,000.
- Sales in units over the next six years are projected to be asfollows:
| Year | Sales in Units |
| 1 | 9,000 |
| 2 | 15,000 |
| 3 | 18,000 |
| 4–6 | 22,000 |
|
- Production and sales of the device would requireworking capital of $60,000 to finance accounts receivable,inventories, and day-to-day cash needs. This working capital wouldbe released at the end of the project’s life.
- The devices would sell for $35 each; variable costsfor production, administration, and sales would be $15 perunit.
- Fixed costs for salaries, maintenance, propertytaxes, insurance, and straight-line depreciation on the equipmentwould total $135,000 per year. (Depreciation is based on cost lesssalvage value.)
- To gain rapid entry into the market, the companywould have to advertise heavily. The advertising costs wouldbe:
| Year | Amount of Yearly
Advertising |
| 1–2 | $ | 180,000 | |
| 3 | $ | 150,000 | |
| 4–6 | $ | 120,000 | |
|
- The company’s required rate of return is 14%.
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determinethe appropriate discount factor(s) using tables.
Required:
1. Compute the net cash inflow (incremental contribution marginminus incremental fixed expenses) anticipated from sale of thedevice for each year over the next six years.
2-a. Using the data computed in (1) above and other dataprovided in the problem, determine the net present value of theproposed investment.
2-b. Would you recommend that Matheson accept the device as anew product?
