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 | 12,000 |
2 | 17,000 |
3 | 19,000 |
4–6 | 21,000 |
Year | Amount of Yearly Advertising |
||
1–2 | $ | 73,000 | |
3 | $ | 63,000 | |
4–6 | $ | 53,000 | |
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 = (Cost - Salvage value) / Useful life = ($228,000 - $12,000) / 6 = $36,000
Computation of net cash inflow from sale of device | ||||
Particulars | Year 1 | Year 2 | Year 3 | Year 4-6 |
Sales in units | 12000 | 17000 | 19000 | 21000 |
Sales in dollar | $720,000.00 | $1,020,000.00 | $1,140,000.00 | $1,260,000.00 |
Variable expenses | $540,000.00 | $765,000.00 | $855,000.00 | $945,000.00 |
Contribution margin | $180,000.00 | $255,000.00 | $285,000.00 | $315,000.00 |
Fixed Expenses: | ||||
Salaries and other (Excluding depreciation) | $113,000.00 | $113,000.00 | $113,000.00 | $113,000.00 |
Advertising | $73,000.00 | $73,000.00 | $63,000.00 | $53,000.00 |
Total fixed expenses | $186,000.00 | $186,000.00 | $176,000.00 | $166,000.00 |
Net cash inflow (Outflow) | -$6,000.00 | $69,000.00 | $109,000.00 | $149,000.00 |
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 | -$228,000 | ||||||
Working capital | -$54,000 | ||||||
Yearly net cash flows | -$6,000 | $69,000 | $109,000 | $149,000 | $149,000 | $149,000 | |
Release of working capital | $54,000 | ||||||
Salavage value of equipment | $16,000 | ||||||
Total cash flows | -$282,000 | -$6,000 | $69,000 | $109,000 | $149,000 | $149,000 | $219,000 |
PV Factor | 1.000 | 0.870 | 0.756 | 0.658 | 0.572 | 0.497 | 0.432 |
Present Value | -$282,000 | -$5,220 | $52,164 | $71,722 | $85,228 | $74,053 | $94,608 |
Net present value | $90,555 |
As NPV is positive, therefore Matheson accept the device as a new product
Matheson Electronics has just developed a new electronic device that it believes will have broad market...
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