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 | $ | 223,000 | |
3 | $ | 71,000 | |
4–6 | $ | 61,000 | |
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?
Solution 1:
Annual Depreciation = ($474000 - $24000) / 6 = $75000
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 | $5,40,000.00 | $6,90,000.00 | $7,50,000.00 | $8,10,000.00 |
Variable expenses | $2,70,000.00 | $3,45,000.00 | $3,75,000.00 | $4,05,000.00 |
Contribution margin | $2,70,000.00 | $3,45,000.00 | $3,75,000.00 | $4,05,000.00 |
Fixed Expenses: | ||||
Salaries and other (Excluding depreciation) | $69,000.00 | $69,000.00 | $69,000.00 | $69,000.00 |
Advertising | $2,23,000.00 | $2,23,000.00 | $71,000.00 | $61,000.00 |
Total fixed expenses | $2,92,000.00 | $2,92,000.00 | $1,40,000.00 | $1,30,000.00 |
Net cash inflow (Outflow) | -$22,000.00 | $53,000.00 | $2,35,000.00 | $2,75,000.00 |
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 | -$4,74,000 | ||||||
Working capital | -$62,000 | ||||||
Yearly net cash flows | -$22,000 | $53,000 | $2,35,000 | $2,75,000 | $2,75,000 | $2,75,000 | |
Release of working capital | $62,000 | ||||||
Salavage value of equipment | $24,000 | ||||||
Total cash flows | -$5,36,000 | -$22,000 | $53,000 | $2,35,000 | $2,75,000 | $2,75,000 | $3,61,000 |
PV Factor | 1.000 | 0.847 | 0.718 | 0.609 | 0.516 | 0.437 | 0.370 |
Present Value | -$5,36,000 | -$18,634 | $38,054 | $1,43,115 | $1,41,900 | $1,20,175 | $1,33,570 |
Net present value | $22,180 |
Solution 2b:
Yes, Matheson should accept the device as a new product.
Matheson Electronics has just developed a new electronic device that it believes will have broad market...
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: New equipment would have to be acquired to produce the device. The equipment would cost $258,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000. Sales in units over the next six years are projected to be as follows: Year Sales...
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: New equipment would have to be acquired to produce the device. The equipment would cost $150,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000. Sales in units over the next six years are projected to be as follows: Year Sales...
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: New equipment would have to be acquired to produce the device. The equipment would cost $120,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000. Sales in units over the next six years are projected to be as follows: Year Sales...
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: New equipment would have to be acquired to produce the device. The equipment would cost $216,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. Sales in units over the next six years are projected to be as follows: Year Sales...
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: New equipment would have to be acquired to produce the device. The equipment would cost $216,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. Sales in units over the next six years are projected to be as follows: Year Sales...
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: New equipment would have to be acquired to produce the device. The equipment would cost $120,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000. Sales in units over the next six years are projected to be as follows: Year Sales...
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: New equipment would have to be acquired to produce the device. The equipment would cost $228,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. Sales in units over the next six years are projected to be as follows: Year Sales...
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 $168,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. b. Sales in units over the next six years are projected to be as follows:...
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:
New equipment would have to be acquired to produce the device.
The equipment would cost $480,000 and have a six-year useful life.
After six years, it would have a salvage value of about
$12,000.
Sales in units over the next six years are projected to be as
follows:
Year
Sales...
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: New equipment would have to be acquired to produce the device. The equipment would cost $138,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000. Sales in units over the next six years are projected to be as follows: Year Sales...