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Data Problem 3 Matheson Electronics has just developed a new device which, when mounted on an automobile, will tell the driver how many miles the
Data Problem 3 | ||||||
Matheson Electronics has just developed a new device which, when mounted on an automobile, | ||||||
will tell the driver how many miles the automobile is traveling per gallon of gasoline. | ||||||
The company is anxious to begin production of the new device. To this end, marketing and cost | ||||||
studies have been made to determine probable costs and market potential. These studies have | ||||||
provided the following information: | ||||||
MATHESON ELECTRONICS | ||||||
Probable costs and market potential: | ||||||
New equipment cost | $315,000 | Needed to produce device. | ||||
Usable life in years | 12 | |||||
Salvage value | $15,000 | At the end of 12 years. | ||||
Working capital investment | $60,000 | Released at the end of 12 years. | ||||
Projected sales over next 12 years: | ||||||
Year | Unit Sales | |||||
1 | 6,000 | |||||
2 | 12,000 | |||||
3 | 15,000 | |||||
4-12 | 18,000 | |||||
Unit selling price | $35 | |||||
Variable costs per unit | $15 | for production, admin and selling. | ||||
Fixed costs per year | $135,000 | Salaries, Maintenance, property | ||||
taxes, insurance & depreciation. | ||||||
Advertising costs: | ||||||
Year | Amount | |||||
1-2 | $180,000 | |||||
3 | $150,000 | |||||
4-12 | $120,000 | |||||
Minimum rate of return | 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 12 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. | ||||||
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