Chapter $8$ Case

Englewood Company has an opportunity to produce and sell a revolutionary new smoke detector

for homes. To determine whether this would be a profitable venture, the company has gathered the

following data on probable costs and market potential:

a$.$ New equipment would have to be acquired to produce the smoke detector. The equipment

would cost $$100,000$ and be useable for $12$ years. After $12$ years, it would have a salvage

value equal to $10\%$ of the original cost.

b$.$ Production and sales of the smoke detector would require a working capital investment of

$$40,000$ to finance accounts receivable, inventories, and day$-$to$-$day cash needs. This

working capital would be released for use elsewhere after $12$ years.

c$.$ An extensive marketing study projects sales in units over the next $12$ years as follows:

d$.$ The smoke detectors would sell for $$45$ each; variable costs for production, administration,

and sales would be $$25$ per unit.

e$.$ To gain entry into the market, the company would have to advertise heavily in the early

years of sales. The advertising program follows:

Year

$1-2$

$3.$

$4-12$

Amount of Yearly

Advertising

$$70,000$

$$50,000$

$$40,000$

f$.$ Other fixed costs for salaries, insurance, maintenance, and straight$-$line depreciation on

equipment would total $$127,500$ per year. $($Depreciation is based on cost less salvage

value.$)$

g$.$ The company's required rate of return and tax rate are both $20\%.$

Required:

$(6$ points$)$ Compute the net cash inflow $($cash receipts less yearly cash operating expenses$)$

anticipated from the sale of the smoke detectors for each year over the next $12$ years.

$(4$ points$)$ 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

Englewood Company accept the smoke detector as a new product?