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 $318,000 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 Sales in Units 8,000 13,000 15,000 17,000 4-6 c. Production and sales of the device would require working capital of $62,000 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 $15 per unit. e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $169,000 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: Amount of Yearly

Answer 1

			year 1	year 2	year 3	year 4-6
incremental contribution margin			160000	260000	300000	340000
incremental fixed cost			239,000	239,000	170,000	160,000
Net cash inflow(outflow)			-79,000	21,000	130,000	180,000

2-a)				Now	1	2	3	4	5	6
	cost of Equipment			-318,000
	Working capital			-62,000
	yearly net cash flows				-79,000	21,000	130,000	180,000	180,000	180,000
	Release of working capital									62,000
	Salvage value of Equipment									18,000
	total cash flows			-380,000	-79000	21000	130000	180000	180000	260000
	discount factor (8%)			1	0.926	0.857	0.794	0.735	0.681	0.63
	present value			-380,000	-73154	17997	103220	132300	122580	163800	86,743
	Net present value			86,743
2-b)	yes

Working notes
Depreciation expense
(318000-18000)/6
50000
fixed costs for salaires (cash outflow)=
		169000-50000
		119000
			year 1	year 2	year 3	year 4-6
Sale in units			8,000	13,000	15,000	17,000
Sales in dollars			280000	455000	525000	595000
variable expenses			120000	195000	225000	255000
contribution margin			160000	260000	300000	340000
Fixed expenses:
Salaries and other			119,000	119,000	119,000	119,000
Advertising			120,000	120,000	51,000	41,000
total fixed expeneses			239,000	239,000	170,000	160,000
Net cash inflow(outflow)			-79,000	21,000	130,000	180,000