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?
year 1 | year 2 | year 3 | year 4-6 | |||
incremental contribution margin | 150000 | 225000 | 255000 | 285000 | ||
incremental fixed cost | 154,000 | 154,000 | 148,000 | 138,000 | ||
Net cash inflow(outflow) | -4,000 | 71,000 | 107,000 | 147,000 | ||
2-a) | Now | 1 | 2 | 3 | 4 | 5 | 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 | ||||||||||
Salvage value of Equipment | 12,000 | ||||||||||
total cash flows | -269,000 | -4000 | 71000 | 107000 | 147000 | 147000 | 212000 | ||||
discount factor (14%) | 1 | 0.877 | 0.769 | 0.675 | 0.592 | 0.519 | 0.456 | ||||
present value | -269,000 | -3508 | 54599 | 72225 | 87024 | 76293 | 96672 | 114,305 | |||
Net present value | 114,305 | ||||||||||
2-b) | yes | ||||||||||
working notes
Depreciation expense | |||||||
(216000-12000)/6 | |||||||
34000 | |||||||
fixed costs for salaires (cash outflow)= | |||||||
120000-34000 | |||||||
86000 | |||||||
year 1 | year 2 | year 3 | year 4-6 | ||||
Sale in units | 10,000 | 15,000 | 17,000 | 19,000 | |||
Sales in dollars | 550000 | 825000 | 935000 | 1045000 | |||
variable expenses | 400000 | 600000 | 680000 | 760000 | |||
contribution margin | 150000 | 225000 | 255000 | 285000 | |||
Fixed expenses: | |||||||
Salaries and other | 86,000 | 86,000 | 86,000 | 86,000 | |||
Advertising | 68,000 | 68,000 | 62,000 | 52,000 | |||
total fixed expeneses | 154,000 | 154,000 | 148,000 | 138,000 | |||
Net cash inflow(outflow) | -4,000 | 71,000 | 107,000 | 147,000 |
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 $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 $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 $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...
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 $228,000 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:...
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 $318,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000 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 $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 $474,000 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...