Question

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 $120,000 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 OWN Sales in Units 6,000 11,000 13,000 15,000 c. Production and sales of the device would require working capital of $44,000 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 $45 each; variable costs for production, administration, and sales would be $25 per unit. e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $132,000 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 Amount of Yearly Advertising $ 74,000 $53,000 $ 43,000 4-6 g. The company's required rate of return is 15%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Answer 1

Net cash flow
	Year 1	2	3	Year 4-6
Incremental contribution margin	120000	220000	260000	300000
Incremental Fixed expenses	189000	189000	168000	158000
Net Cash inflow (outflow)	-69000	31000	92000	142000
Note: Dpereciation does not lead to outflow of cash, hence, deducted from fixed costs
	Year 0	Year 1	2	3	4	5	6
Cost of Equipment	-120000
Investment in working capital	-44000
Cash flow		-69000	31000	92000	142000	142000	142000
After tax salvage value							18000
Recovery of working capital							44000
Net cash flow	-164000	-69000	31000	92000	142000	142000	204000
PVF	1	0.869565217	0.756143667	0.657516232	0.571753246	0.497176735	0.432327596
PV of cash flows	-164000	-60000	23440.45369	60491.49338	81188.96087	70599.09641	88194.82957
NPV	99914.83392
Yes, since NPV is positive

8 B G 1 Net cash flow Year 1 Year 4-6 3 Incremental contribution margil=(45-25)*6000 =(45-25)*11000 =(45-25)*13000 =(45-25)* 15000 4 Incremental Fixed expenses =132000+74000-(120000-18000)/6 =132000+74000-17000 =132000+53000-17000 =132000+43000-17000 5 Net Cash inflow (outflow) =B3-B4 =C3-C4 =D3-D4 =E3-E4 6 Note: Dpereciation does not lea 7 Year Year 1 2 3 4 5 6 9 Cost of Equipment -120000 10 Investment in working capital -44000 11 Cash flow =B5 =C5 =D5 =E5 =F11 =G11 12 After tax salvage value 18000 13 Recovery of working capital 44000 14 Net cash flow =SUM(B9:B13) =SUM(C11:C13) =SUM(D11:013) =SUM(E11:E13) 1=SUM(F11:F13) =SUM(G11:G13) =SUM(H11:H13) 15 PVF =1 =B15/1.15 C15/1.15 =D15/1.15 =E15/1.15 =F15/1.15 =G15/1.15 16 PV of cash flows =B14*B15 C14*C15 =D14*D15 =E14*E15 =F14* F15 =G14*G15 =H14*H15 17 NPV =SUM(B16:H16) 18 19 Yes, since NPV is positive