Case 14 32 (Algo) Net Present Value Analysis of a New Product LO14 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 New equipment would have to be acquired to produce the device The equipment would cost $486,000 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 in Units 1 18,000 2 23,000 3 25,000 46 27,000 Production and sales of the device would require working capital of $63,000 to finance accounts receivable, inventories, and day to day cash needs This working capital would be released at the end of the projects life The devices would sell for $35 each variable costs for production, administration, and sales would be $20 per unit Fixed costs for salaries, maintenance, property taxes, insurance, and straight line depreciation on the equipment would total $159,000 per year (Depreciation is based on cost less salvage value ) To gain rapid entry into the market, the company would have to advertise heavily The advertising costs would be Year Amount of Yearly Advertising 12 $ 228,000 3 $ 72,000 46 $ 62,000 The companys required rate of return is 18 Click here to view Exhibit 14B 1 and Exhibit 14B 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 Prev Question 14 of 14 Total 14 of 14 Visit question mapThis is the last question in the assignment To submit, use Alt S To access other questions, proceed to the question map button Next

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Case 14-32 (Algo) Net Present Value Analysis of a New Product [LO14-2] Matheson Electronics has just developed a new electronic device that it believes will

Case 14-32 (Algo) Net Present Value Analysis of a New Product [LO14-2]

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:

New equipment would have to be acquired to produce the device. The equipment would cost $486,000 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 in Units
1	18,000
2	23,000
3	25,000
46	27,000

Production and sales of the device would require working capital of $63,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the projects life.
The devices would sell for $35 each; variable costs for production, administration, and sales would be $20 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $159,000 per year. (Depreciation is based on cost less salvage value.)
To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:

Year	Amount of Yearly Advertising
12	$ 228,000
3	$ 72,000
46	$ 62,000

The companys required rate of return is 18%.

Click here to view Exhibit 14B-1 and Exhibit 14B-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?

Question 14 of 14 Total14 of 14

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