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 | 18,000 |
2 | 23,000 |
3 | 25,000 |
4–6 | 27,000 |
Year | Amount of Yearly Advertising |
||
1–2 | $ | 183,000 | |
3 | $ | 69,000 | |
4–6 | $ | 59,000 | |
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.
Solution 1:
Annual depreciation = (Cost - Salvage value) / Useful life = ($444,000 - $6,000) / 6 = $73,000
Computation of net cash inflow from sale of device | ||||
Particulars | Year 1 | Year 2 | Year 3 | Year 4-6 |
Sales in units | 18000 | 23000 | 25000 | 27000 |
Sales in dollar | $990,000.00 | $1,265,000.00 | $1,375,000.00 | $1,485,000.00 |
Variable expenses | $720,000.00 | $920,000.00 | $1,000,000.00 | $1,080,000.00 |
Contribution margin | $270,000.00 | $345,000.00 | $375,000.00 | $405,000.00 |
Fixed Expenses: | ||||
Salaries and other (Excluding depreciation) | $96,000.00 | $96,000.00 | $96,000.00 | $96,000.00 |
Advertising | $183,000.00 | $183,000.00 | $69,000.00 | $59,000.00 |
Total fixed expenses | $279,000.00 | $279,000.00 | $165,000.00 | $155,000.00 |
Net cash inflow (Outflow) | -$9,000.00 | $66,000.00 | $210,000.00 | $250,000.00 |
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 | -$444,000 | ||||||
Working capital | -$60,000 | ||||||
Yearly net cash flows | -$9,000 | $66,000 | $210,000 | $250,000 | $250,000 | $250,000 | |
Release of working capital | $60,000 | ||||||
Salavage value of equipment | $6,000 | ||||||
Total cash flows | -$504,000 | -$9,000 | $66,000 | $210,000 | $250,000 | $250,000 | $316,000 |
PV Factor | 1.000 | 0.870 | 0.756 | 0.658 | 0.572 | 0.497 | 0.432 |
Present Value | -$504,000 | -$7,830 | $49,896 | $138,180 | $143,000 | $124,250 | $136,512 |
Net present value | $80,008 |
Solution 2b:
Matheson should accept the device as a new product.
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