Case 13-32 Net Present Value Analysis of a New Product [LO13-2]
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 | 8,000 |
2 | 13,000 |
3 | 15,000 |
4–6 | 17,000 |
Year | Amount of Yearly Advertising |
||
1–2 | $ | 46,000 | |
3 | $ | 57,000 | |
4–6 | $ | 47,000 | |
Click here to view Exhibit 13B-1 and Exhibit 13B-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?
Solution 1:
Annual depreciation on equipment = ($168,000 - $12,000) / 6 = $26,000
Computation of net cash inflow from sale of device | ||||
Particulars | Year 1 | Year 2 | Year 3 | Year 4-6 |
Sales in units | 8000 | 13000 | 15000 | 17000 |
Sales in dollar | $240,000.00 | $390,000.00 | $450,000.00 | $510,000.00 |
Variable expenses | $120,000.00 | $195,000.00 | $225,000.00 | $255,000.00 |
Contribution margin | $120,000.00 | $195,000.00 | $225,000.00 | $255,000.00 |
Fixed Expenses: | ||||
Salaries and other (Excluding depreciation) | $106,000.00 | $106,000.00 | $106,000.00 | $106,000.00 |
Advertising | $46,000.00 | $46,000.00 | $57,000.00 | $47,000.00 |
Total fixed expenses | $152,000.00 | $152,000.00 | $163,000.00 | $153,000.00 |
Net cash inflow (Outflow) | -$32,000.00 | $43,000.00 | $62,000.00 | $102,000.00 |
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 | -$168,000 | ||||||
Working capital | -$48,000 | ||||||
Yearly net cash flows | -$32,000 | $43,000 | $62,000 | $102,000 | $102,000 | $102,000 | |
Release of working capital | $48,000 | ||||||
Salavage value of equipment | $12,000 | ||||||
Total cash flows | -$216,000 | -$32,000 | $43,000 | $62,000 | $102,000 | $102,000 | $162,000 |
PV Factor | 1.000 | 0.935 | 0.873 | 0.816 | 0.763 | 0.713 | 0.666 |
Present Value | -$216,000 | -$29,920 | $37,539 | $50,592 | $77,826 | $72,726 | $107,892 |
Net present value | $100,655 |
Solution 2b:
As NPV is positive, therefore Matheson accept the device as a new product
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