CASE 832 Net Present Value Analysis of a New Product [LO 8-2]

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 $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.	Page 373 To gain rapid entry into the market, the company would have to advertise heavily. The advertising program would be:
g.	The companys required rate of return is 14%.

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.	Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. Would you recommend that Matheson accept the device as a new product?

Year Sales in Units 2 3 4-6 9,000 15,000 18,000 22,000