need help with 9) using info below

question 9) below. the contribution margin answer is 247,500

Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the following information: a. New equipment would have to be acquired to produce the device. The equipment would cost $240,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000. b. Sales in units over the next six years are projected to be as follows: Year 1 2 3 Sales in Units 13,000 18,000 20,000 22,000 c. Production and sales of the device would require working capital of $56,000 to finance accounts receivable, inventories, and day- to-day cash needs. This working capital would be released at the end of the project's life. d. The devices would sell for $35 each; variable costs for production, administration, and sales would be $20 per unit. e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $151,000 per year. (Depreciation is based on cost less salvage value.) f. To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be: Year 1-2 3 4-6 Amount of Yearly Advertising $128,000 $ 65,000 $ 55,000 g. The company's required rate of return is 17%. year 1 year 2 year 3 year 4-6 incremental contribution margin 195000 270000 300000 330000 incremental fixed cost 242,000 242,000 179,000 169,000 Net cash inflow(outflow) -47,000 28,000 121,000 161,000 2 cost of Equipment Working capital yearly net cash flows Release of working capital Salvage value of Equipment total cash flows discount factor (17%) present value Net present value Now 3 4 5 6 -240,000 -56,000 -47,000 28,000 121,000 161,000 161,000 161,000 56,000 18,000 -296,000 -47000 28000 121000 161000 161000 235000 0.855 0.731 0.624 0.534 0.456 0.39 -296,000 -40185 20468 75504 85974 73416 91650 10,827 yes a. DO THIS ONLY IF YOU ANSWERED YES on connect. If you answered no, skip this. If your answer to 2-b on CONNECT was "yes", complete this requirement. It means your NPV was positive and Matheson should accept the device as a new product. Let's assume the company is concerned about its advertising budget and would like to decrease its advertising by 20% in years 1 and 2. A marketing study indicates that decreasing the advertising cost by 20% in the years 1 and 2 only, will decrease sales in the first second and third year by 15%. (Remember that changing the projected sales will also change the COGS) Projected sales in years 4 through 6 as well as the cost assumptions would remain unchanged. What would the new Net Present Value be with these adjustments to advertising expense and sales? Should Matheson Electronics accept the device now? Show your work by include the Cash Flows for the appropriate years and the discount factors used in the table below. Y3 Y4 YS Y6 76,000 161,000 161,000 Use these table for (a) or (b) (10 points): Now Y1 Y2 Cost of equipment 240,000 Working capital -56,000 Yearly net cash flow -50,650 13,100 Release of working capital Salvage value of equipment Total cash flows (a) 296,000 -50,650 13,100 Discount Factor (b) 1.000 0.855 0.731 Present Value (a)x(b) 296,000 -43,305.759,576.10 Net Present Value -31,265.65 161,0000 56,000 18,000 235,000 0.390 91,650 76,000 0.624 47,424 161,000 0.534 85,974 161,000 0.456 73,416 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Now -168,000 -56,000 -44,120 30,880 123,880 161,000 161,000 161,000 56,000 18,000 Cost of Equipment Working capital Yearly net Cash Flows Release of Working Capital Salvage value of Equipment Repayment of Loan Total Cash Flows (a) Discount Factor (b) Present Value (a*b) Net Present Value -224,000 1.000 -224,000 44,264 -44, 120 0.855 -37,723 30,880 0.731 22,573 -72,000 51,880 0.624 32,373 161,000 0.534 85,974 161,000 0.456 73,416 235,000 0.390 91,650 Year 0 1 2 3 Cash Flows Cummulative Cash Flows -224,000 -224,000 -44,120 -268,120 30,880 -237,240 51,880 - 185,360 161,000 -24,360 161,000 136,640 235,000 371,640 4+24360/161000 4 5 6 Payback Period Payback Period 4.15 Years 4. Matheson's electronic device proposal is one of four investment proposal the company is considering. The electronic device is labeled as Investment A. Information relating to Investment Proposal B, C and D are outlined below. Investment B: Initial Investment, Net Present Value and Life of the project is half of A's. Investment C: Initial Investment, Net Present Value and Life of the project is twice of A's. Investment D: Initial Investment and Net Present Value is the same as A's. The Life of the project is the 10 years. a. Use the information provided for Investments B thru D along with information regarding A to complete the table below. Initial Investment Net Present Value Life of Project Profitability Index A 224,000 44,264 6 1.20 B 112,000 22,132 3 1.20 448,000 88,528 12 1.20 D 224,000 44,264 10 1.20 Required 5 Calculation of Net Operating Income for Matheson's Operations in Year 4 Expected Sales in Units 22000 Projected Year 4 Per Unit Sales Revenue 770000 Variable Expensws 440000 Contribution Margin 330000 Fixed Expenses: Salaries and Other (w/o Dep) (151000-37000) 114000 Depreciation 37000 Advertising 55000 Total Fixed Expenses 206000 Net operating Income 124000 240000 6 Years 18000 Calculation of Depreciation Cost of the Asset Life Salvage value at end of 6 years Depreciation is based on: Cost Less Salvage Value Yearly Depreciation would be (220000/6 Years) 222000 37000 Required 6 Calculation of Matenson's Simple rate of return for electric device for Year 4: Formula will be Simple rate of Return (ARR)= Net Operating Income/Initial Investment*100 (124000/240000)*100 51.67% Required 7 Calculation of Company's Avarage Operating Assets for Year 4: Average Operating Assets will be withoiut considering Depreciation: Beginning of Year 1 240000 End of Year 1 240000 End of Year 3 240000 End of Year 4 240000 Total 960000 Average operating Assets before Working Capital (960000/4 Years) 240000 Working Capital at Beginning of Year 1 56000 Avarage Operating Assets for year 4 will be 296000 8.a) ROI = Net operating income/Average operating assets = 124,000/180,000 = 68.89% The similarity between simple rate of return & ROI is Net operating income (NOI) which is used as numerator in both the ratios. However, the difference between the two is regarding the denominator which comprises of average operating assets in case of ROI, whereas under ARR or simple rate of return, there is initial investment in the denominator instead of average operating assets. b) Yes, ROI is also equal to Margin times Turnover as shown below- Net profit Margin = (Net income/Net sales revenue)*100 = 124,000/770,000 = 16.10% Total assets turnover = Net sales revenue/Average total operating assets) = 770,000/180,000 = 4.28 Using DuPont formula, net profit margin & turnototal asset turnover are used in calculating ROI. ROI = Net profit margin * Total assets turnover = 16.10%* 4.28 = 68.90% 9. At the end of year 4, Matheson's operating results did not meet expectations. Because of labor negotiations the variable cost for production has increased by $2.50 a unit. Sales are also 10% lower than expectations and fixed costs have increased because of repairs and maintenance each year in the amount equal to 8% of the equipment's original cost. a. Calculate the NOI for year 4 considering all the items mentioned above. Actual Y4 Sales texenue Reduced units sold by 10% Variable expenses Reduced units sold and increase cost per unit by 2.50 Contribution margin Fixed expenses: Salaries and Other (w/o Dep) Add 8% of equipment costs Depreciation Advertising Total Fixed expenses Net Operating Income b. Calculate the actual Margin, Turnover and ROI for Year 4 based on the description. - C. Is Matbeson's electronic device operations better or worse off than originally projected? Explain. (30 to 50 years)