Question
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
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: |
a. | New equipment would have to be acquired to produce the device. The equipment would cost $180,000 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: |
Year | Sales in Units |
1 | 8,500 |
2 | 13,500 |
3 | 15,500 |
46 | 17,500 |
|
c. | Production and sales of the device would require working capital of $49,000 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 $20 per unit. |
e. | Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $153,000 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 program would be: |
Year | Amount of Yearly Advertising | ||
12 | $ | 78,000 | |
3 | $ | 58,000 | |
46 | $ | 48,000 | |
|
g. | The companys required rate of return is 9%. |
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 (cash receipts less yearly cash operating 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. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.) |
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