Question #3

Atlas Company has an opportunity to produce and sell a revolutionary new carbon monoxide detector for homes. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential. A. New equipment would have to be acquired to produce the carbon monoxide detector The equipment would cost $100,000 and be usable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost. The asset will be sold as salvage value at the end of the assets life. s io,o00 Production and sales of the carbon monoxide detector would require a working capital investment of $40,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 12 years. (hint: this is a cash out flow at the beginning of the project and a cash in-flow at the end of the 12 years) B. C. An extensive marketing study projects sales in units over the next 12 years as follows. Year Sales in Units 4,000 7,000 10,000 12,000 4-12 D. The carbon monoxide detectors would sell for $45 each; variable cost for production, administration and sales would be $25 per unit. E. To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows. Amount of yearly advertising $70,000 $50,000 $40,000 Year 1-2 4-12 F. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $127,500 per year G. The company's required rate of return is 20%. Required (Ignore income tax) 1. Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from the sale of the carbon monoxide detectors for each year over the next 12 years 2. Using the data in (1) above and the other data provided in the problem, determine the net present value of the proposed investment 3. Write an executive summary to the CFO, Cindy Grinch, explaining your findings and making a recommendation to accept or reject the new carbon monoxide detector product