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 $480,000 and have a six-year useful life.After six years, it would have a salvage value of about$12,000.
- Sales in units over the next six years are projected to be asfollows:
| Year | Sales in Units |
| 1 | 15,000 |
| 2 | 20,000 |
| 3 | 22,000 |
| 4–6 | 24,000 |
|
- Production and sales of the device would requireworking capital of $61,000 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 $155,000 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 | $ | 218,000 | |
| 3 | $ | 70,000 | |
| 4–6 | $ | 60,000 | |
|
- The company’s required rate of return is 15%.
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?
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 $480,000 and have a six-year useful life.After six years, it would have a salvage value of about$12,000.
- Sales in units over the next six years are projected to be asfollows:
| Year | Sales in Units |
| 1 | 15,000 |
| 2 | 20,000 |
| 3 | 22,000 |
| 4–6 | 24,000 |
|
- Production and sales of the device would requireworking capital of $61,000 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 $155,000 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 | $ | 218,000 | |
| 3 | $ | 70,000 | |
| 4–6 | $ | 60,000 | |
|
- The company’s required rate of return is 15%.
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?
Compute the net cash inflow (incremental contribution marginminus incremental fixed expenses) anticipated from sale of thedevice for each year over the next six years. (Negative amountsshould be indicated by a minus sign.)
|
| | Year 1 | Year 2 | Year 3 | Year 4-6 | | Incremental contribution margin | | | | | | Incrememental fixed expenses | | | | | | Net cash inflow(outflow) | | | | |
|
Using the data computed in (1) above and other data provided inthe problem, determine the net present value of the proposedinvestment. (Negative amounts should be indicated by a minus sign.Round your final answer to the nearest whole dollar amount.)
