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Comment: Need Help on Required 2-a. Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company

Comment: Need Help on Required 2-a.

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:

Year Sales in Units
1 9,000
2 15,000
3 18,000
46 22,000
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 program would be:
Year Amount of Yearly Advertising
12 $ 180,000
3 $ 150,000
46 $ 120,000
g. The companys required rate of return is 14%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Exhibit B1

http://lectures.mhhe.com/connect/007802563x/exhibit_13b-1.jpg

Exhibit B2

http://lectures.mhhe.com/connect/007802563x/exhibit_13b-2.jpg

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

Answer is complete and correct

Year 1 Year 2 Year 3 Year 4-6
Sales in units 9,000 15,000 18,000 22,000
Sales in dollars $315,000 $525,000 $630,000 $770,000
Variable expenses 135,000 225,000 270,000 330,000
Contribution margin 180,000 300,000 360,000 440,000
Fixed expenses:
Salaries and other 85,000 85,000 85,000 85,000
Advertising 180,000 180,000 150,000 120,000
Total fixed expenses 265,000 265,000 235,000 205,000
Net cash inflow (outflow) $(85,000) $35,000 $125,000 $235,000
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.)

Answer is not complete

Now 1 2 3 4 5 6
Cost of equipment $(315,000)
Working capital (60,000)
Yearly net cash flows
Release of working capital 60,000
Salvage value of equipment 15,000
Total cash flows $(375,000) $0 $0 $0 $0 $0 $75,000
Discount factor (14%)
Present value
Net present value $0

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