Question

Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studied that revealwd the following information:

a. New equipment would have to be acquired to produce the device. The equipment would cost $264,000 and have a six-year useful life. After six years, it would have a salvage value of about $24.000. b. Sales in units over the next six years are projected to be as follows: Year Sales in Units 1 13,000 18.000 20.000 22,000 c. Production and sales of the device would require working capital of $59,000 to finance accounts receivable, inventories, and day. to-day cash needs. This working capital would be released at the end of the project's life. d. The devices would sell for $50 each: variable costs for production, administration, and sales would be $35 per unit. e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $169,000 per year. (Depreciation is based on cost less salvage value.) f. To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be: Year Amount of Yearly Advertising $133.000 $68.000 $ 58,000 9. The company's required rate of return is 16%. 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?

Answer 1

1.

	Year 1	Year 2	Year 3	Year 4-6
Incremental contribution margin	$ 195,000	$ 270,000	$ 300,000	$ 330,000
Incremental fixed expenses	262,000	262,000	197,000	187,000
Net cash inflow ( outflow)	- 67,000	8,000	103,000	143,000

2. a.

Net Present Value : - $ 69,011.40

Year	Cash Inflow	PV Factor	Present Values
0	- 323,000	1.0000	- 323,000
1	- 67,000	0.8621	- 57,760.70
2	8,000	0.7432	5,945.60
3	103,000	0.6407	65,992.10
4	143,000	0.5523	78,978.90
5	143,000	0.4761	68,082.30
6	226,000	0.4104	92,750.40
		NPV	- 69,011.40

2. b. No.