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 | $ | 32,000 | |
3 | $ | 60,000 | |
4–6 | $ | 50,000 | |
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 = ($114,000 - $6000) / 6 = $18,000
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 | $360,000.00 | $585,000.00 | $675,000.00 | $765,000.00 |
Variable expenses | $240,000.00 | $390,000.00 | $450,000.00 | $510,000.00 |
Contribution margin | $120,000.00 | $195,000.00 | $225,000.00 | $255,000.00 |
Fixed Expenses: | ||||
Salaries and other (Excluding depreciation) | $159,000.00 | $159,000.00 | $159,000.00 | $159,000.00 |
Advertising | $32,000.00 | $32,000.00 | $60,000.00 | $50,000.00 |
Total fixed expenses | $191,000.00 | $191,000.00 | $219,000.00 | $209,000.00 |
Net cash inflow (Outflow) | -$71,000.00 | $4,000.00 | $6,000.00 | $46,000.00 |
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 | -$114,000 | ||||||
Working capital | -$51,000 | ||||||
Yearly net cash flows | -$71,000 | $4,000 | $6,000 | $46,000 | $46,000 | $46,000 | |
Release of working capital | $51,000 | ||||||
Salavage value of equipment | $6,000 | ||||||
Total cash flows | -$165,000 | -$71,000 | $4,000 | $6,000 | $46,000 | $46,000 | $103,000 |
PV Factor | 1.000 | 0.943 | 0.890 | 0.840 | 0.792 | 0.747 | 0.705 |
Present Value | -$165,000 | -$66,953 | $3,560 | $5,040 | $36,432 | $34,362 | $72,615 |
Net present value | -$79,944 |
Solution 2b:
As NPV is negative, therefore Matheson should not accept the device as a new product.
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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 $444,000 and have a six-year useful life.
After six years, it would have a salvage value of about
$6,000.
Sales in units over the next six years are projected to be as
follows:
Year
Sales...