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 | 10,000 |
2 | 15,000 |
3 | 17,000 |
4–6 | 19,000 |
Year | Amount of Yearly Advertising |
||
1–2 | $ | 68,000 | |
3 | $ | 62,000 | |
4–6 | $ | 52,000 | |
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 = ($216,000 - $12,000) / 6 = $34,000
Computation of net cash inflow from sale of device | ||||
Particulars | Year 1 | Year 2 | Year 3 | Year 4-6 |
Sales in units | 10000 | 15000 | 17000 | 19000 |
Sales in dollar | $550,000.00 | $825,000.00 | $935,000.00 | $1,045,000.00 |
Variable expenses | $400,000.00 | $600,000.00 | $680,000.00 | $760,000.00 |
Contribution margin | $150,000.00 | $225,000.00 | $255,000.00 | $285,000.00 |
Fixed Expenses: | ||||
Salaries and other (Excluding depreciation) | $86,000.00 | $86,000.00 | $86,000.00 | $86,000.00 |
Advertising | $68,000.00 | $68,000.00 | $62,000.00 | $52,000.00 |
Total fixed expenses | $154,000.00 | $154,000.00 | $148,000.00 | $138,000.00 |
Net cash inflow (Outflow) | -$4,000.00 | $71,000.00 | $107,000.00 | $147,000.00 |
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 | -$216,000 | ||||||
Working capital | -$53,000 | ||||||
Yearly net cash flows | -$4,000 | $71,000 | $107,000 | $147,000 | $147,000 | $147,000 | |
Release of working capital | $53,000 | ||||||
Salavage value of equipment | $12,000 | ||||||
Total cash flows | -$269,000 | -$4,000 | $71,000 | $107,000 | $147,000 | $147,000 | $212,000 |
PV Factor | 1.000 | 0.877 | 0.769 | 0.675 | 0.592 | 0.519 | 0.456 |
Present Value | -$269,000 | -$3,508 | $54,599 | $72,225 | $87,024 | $76,293 | $96,672 |
Net present value | $114,305 |
Solution 2b:
As NPV is positive, therefore 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...
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