As the newly hired analyst for the corporate offices of Illuminated Electronics Corporation (IEC), you must prepare an analysis of a capital budgeting proposal.

Proposal 1 PPD

IEC has just developed a new electronic device (called the PPD) and it believes it 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 $315,000 and have a six-year useful life. After six years, it would have a salvage value of about $15,000.

B) Sales in units over the next six years are projected to be as follows:

C) Production and sales of the device would require working capital of $60,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the projects life.

D) The devices would sell for $35 each; variable costs for production, administration, and sales would be $15 per unit.

E) Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $135,000 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:

G) The companys required rate of return in 14%.

Required:

1) Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from the sale of the PPDs for each year over the next six years.

2) Using the data computed (1) and other data provided in the problem, determine the net present value, internal rate of return, payback period, and profitability index of the proposed investment.

Year12346SalesinUnits9,00015,00018,00022,000 Year12346AmountofYearlyAdvertising$180,000$150,000$120,000