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:
Year | Sales in Units |
1 | 15,000 |
2 | 20,000 |
3 | 22,000 |
4–6 | 24,000 |
Year | Amount of Yearly Advertising |
||
1–2 | $ | 128,000 | |
3 | $ | 67,000 | |
4–6 | $ | 57,000 | |
Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from sale of the device for each year over the next six years.
2-a. Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment.
2-b. Would you recommend that Matheson accept the device as a new product?
Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from sale of the device for each year over the next six years. (Negative amounts should be indicated by a minus sign.)
|
Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount.)
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Would you recommend that Matheson accept the device as a new product?
yes
no
Solution 1:
Annual depreciation = ($258,000 - $24,000) / 6 = $39,000
Computation of net cash inflow from sale of device | ||||
Particulars | Year 1 | Year 2 | Year 3 | Year 4-6 |
Sales in units | 15000 | 20000 | 22000 | 24000 |
Sales in dollar | $675,000.00 | $900,000.00 | $990,000.00 | $1,080,000.00 |
Variable expenses | $450,000.00 | $600,000.00 | $660,000.00 | $720,000.00 |
Contribution margin | $225,000.00 | $300,000.00 | $330,000.00 | $360,000.00 |
Fixed Expenses: | ||||
Salaries and other (Excluding depreciation) | $108,000.00 | $108,000.00 | $108,000.00 | $108,000.00 |
Advertising | $128,000.00 | $128,000.00 | $67,000.00 | $57,000.00 |
Total fixed expenses | $236,000.00 | $236,000.00 | $175,000.00 | $165,000.00 |
Net cash inflow (Outflow) | -$11,000.00 | $64,000.00 | $155,000.00 | $195,000.00 |
Solution 2a:
Computation of Net Present Value - Matheson Electronics | |||||||
Particulars | Now | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
Cost of equipment | -$258,000 | ||||||
Working capital | -$58,000 | ||||||
Yearly net cash flows | -$11,000 | $64,000 | $155,000 | $195,000 | $195,000 | $195,000 | |
Release of working capital | $58,000 | ||||||
Salavage value of equipment | $24,000 | ||||||
Total cash flows | -$316,000 | -$11,000 | $64,000 | $155,000 | $195,000 | $195,000 | $277,000 |
PV Factor | 1.000 | 0.862 | 0.743 | 0.641 | 0.552 | 0.476 | 0.410 |
Present Value | -$316,000 | -$9,482 | $47,552 | $99,355 | $107,640 | $92,820 | $113,570 |
Net present value | $135,455 |
Solution 2b:
As NPV is positive, therefore Matheson should accept the device as a new product.
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