Matheson Electronics has just developed a new electronic devicethat it believes will have broad...

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Matheson Electronics has just developed a new electronic devicethat it 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 $150,000 and have a six-year useful life.After six years, it would have a salvage value of about$18,000.
Sales in units over the next six years are projected to be asfollows:
Year Sales in Units
1 7,000
2 12,000
3 14,000
4–6 16,000
Production and sales of the device would requireworking capital of $47,000 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 $60 each; variable costsfor production, administration, and sales would be $45 perunit.
Fixed costs for salaries, maintenance, propertytaxes, insurance, and straight-line depreciation on the equipmentwould total $151,000 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 $ 45,000
3 $ 56,000
4–6 $ 46,000
The company’s required rate of return is 6%.
Click here to view Exhibit 13B-1 and Exhibit 13B-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?

Answer & Explanation Solved by verified expert

4.2 Ratings (686 Votes)


	year 1	year 2	year 3	year 4-6
incremental contribution margin	105000	180000	210000	240000
incremental fixed cost	174,000	174,000	185,000	175,000
Net cash inflow(outflow)	-69,000	6,000	25,000	65,000

2-a)		Now	1	2	3	4	5	6
	cost of Equipment	-150,000
	Working capital	-47,000
	yearly net cash flows		-69,000	6,000	25,000	65,000	65,000	65,000
	Release of working capital							47,000
	Salvage value of Equipment							18,000
	total cash flows	-197,000	-69000	6000	25000	65000	65000	130000
	discount factor (6%)	1	0.943	0.89	0.84	0.792	0.747	0.705
	present value	-197,000	-65067	5340	21000	51480	48555	91650	-44,042
	Net present value	-44,042

2-b)	no

Working

Depreciation expense
(150000-18000)/6
22000

fixed costs for salaires (cash outflow)=
	151000-22000
	129000

		year 1	year 2	year 3	year 4-6
Sale in units		7,000	12,000	14,000	16,000
Sales in dollars		420000	720000	840000	960000
variable expenses		315000	540000	630000	720000
contribution margin		105000	180000	210000	240000

Fixed expenses:
Salaries and other		129,000	129,000	129,000	129,000
Advertising		45,000	45,000	56,000	46,000
total fixed expeneses		174,000	174,000	185,000	175,000
Net cash inflow(outflow)		-69,000	6,000	25,000	65,000

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Transcribed Image Text

In: AccountingMatheson Electronics has just developed a new electronic devicethat it believes will have broad market...Matheson Electronics has just developed a new electronic devicethat it 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 $150,000 and have a six-year useful life.After six years, it would have a salvage value of about$18,000.Sales in units over the next six years are projected to be asfollows:YearSales in Units17,000212,000314,0004–616,000Production and sales of the device would requireworking capital of $47,000 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 $60 each; variable costsfor production, administration, and sales would be $45 perunit.Fixed costs for salaries, maintenance, propertytaxes, insurance, and straight-line depreciation on the equipmentwould total $151,000 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:YearAmount of YearlyAdvertising1–2$45,0003$56,0004–6$46,000The company’s required rate of return is 6%.Click here to view Exhibit 13B-1 and Exhibit 13B-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?

Year	Amount of Yearly Advertising
1–2	$	45,000
3	$	56,000
4–6	$	46,000