Question

Net Present Value Analysis of a New Product

Answer each question as if you were a consultant hired by Matheson Electronics and are presenting to management as indicated in the case study.

Use outside sources when necessary BUT MAKE SURE YOU CITE THEM!

When giving a recommendation, back it up with numbers and show calculations.

This particular answer should be a management report that no more than two pages in length.

CASE 7-32 Net Present Value Analysis of a New Product L07-2 Matheson Electronics has just developed a new electronic device 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 $315,000 and have a six-year useful life. After six years, it would have a salvage value of about $15,000. b. Sales in units over the next six years are projected to be as follows: Year Sales in Units 1 ... . . . . .. . . . . . .. . . . . .. . . . . . .. . . . . . . 3.... 4-6........ 9,000 15,000 18,000 22,000 c. Production and sales of the device would require working capital of $60,000 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.

Answer 1

Answer is given below

Year 1 9,000 $35 Year 2 15,000 Year 3 18,000 Year 5 22,000 Year 6 22,000 $35 $35 $35 $35 $15 $15 $15 Sales units Selling price Variable cost Contribution per unit Incremental Contribution Margin Less: Fixed Cost Advertising Net Income Add: Depreciation (Non cash item) Net annual cash inflow/(outflow) $20 $180,000 $135,000 $180,000 -$135,0001 $50,000 -$85,000 $15 $20 $300,000 $135,000 $180,000 -$15,000 $50,000 $35,000 $15 $20 $360,000 $135,000 $150,000 $75,000 $50,000 $125,000 Year 4 22,000 $35 $15 $20 $440,000 $135,000 $120,000 $185,000 $50,000 $235,000 $20 $440,000 $135,000 $120,000 $185,000 $50,000 $235,000 $20 $440,000 $135,000 $120,000 $185,000 $50,000 $235,000|| Depreciation per year Cost of machine Salvage value Net cost Depreciation per year $315,000 $15,000 $300,000 $50,000 ($300,000/6 years) Initial investment Cost of Machine Working capital Total Investment $315,000 $60,000 $375,000 Year -$375,000 Year 1 $85,000 Year 2 $35,000 Year 3 $125,000 Year 4 $235,000 Year 5 $235,000 Net annual cash (Outflow) inflow Salvage value Working capital released Total Annual cash (Outflow) inflow Present value factor at 14% Present value of Cash flows Year 6 | $235,000 $15,000 $60,000 $310,000 0.4556 $141,232 -$375,000 1.0000 -$375,000 $85,000 0.87721 $74,561 $35,000 0.7695 $26,931 $125,000 0.6750 $84,371 $235,000 0.5921 $139,139 $235,000 0.5194 $122,052 Net present value $64,164 2 b) Accept the device as a new product since NPV is positive