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: a.New equipment would have to be acquired to producethe device. The equipment would cost $294,000 and have a six-yearuseful life. After six years, it would have a salvage value ofabout $6,000. b.Sales in units over the next six years areprojected to be as follows: Year Sales in Units 1 6,000 2 11,000 313,000 4–6 15,000 c.Production and sales of the device wouldrequire working capital of $45,000 to finance accounts receivable,inventories, and day-to-day cash needs. This working capital wouldbe released at the end of the project’s life. d.The devices wouldsell for $50 each; variable costs for production, administration,and sales would be $30 per unit. e.Fixed costs for salaries,maintenance, property taxes, insurance, and straight-linedepreciation on the equipment would total $171,000 per year.(Depreciation is based on cost less salvage value.) f.To gain rapidentry into the market, the company would have to advertise heavily.The advertising costs would be: Year Amount of Yearly Advertising1–2 $ 74,000 3 $ 54,000 4–6 $ 44,000 g.The company’s required rateof return is 8%. Click here to view Exhibit 13B-1 and Exhibit13B-2, to determine the appropriate discount factor(s) usingtables.

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?