Harlow Appliance has just developed a new air fryer it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the below information:

New equipment would have to be acquired to produce the air fryer. The equipment would cost $157,500 and have a six-year useful life. After six years, it would have a salvage value of $7,500.

Sales in units over the next six years are projected to be as follows:

YEAR SALES IN UNITS 1 - 4,500 2 - 6,000 3 - 7,000 4-6- 10,000

Production and sales of the air fryer would require working capital of $30,000 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 air fryer would sell for $70 each; variable costs for production, administration, and sales would be $40 per unit.

Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $100,000 per year. (Depreciation is based on cost less salvage value.)

To gain rapid entry into the market, the company would have to advertise and the costs would be:

YEAR ANNUAL ADVERTISING ($) 1-2 - $135,000 3 - $112,500 4-6 - $90,000

The companys required rate of return is 10%.

Requirements

Based on the above details, please complete the below requirements:

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.

Using the data computed in (1) above and other data provided in the case,

determine the net present value of the proposed investment rounding present value factors to three decimal places and amounts to whole dollars.

Would you recommend that Harlow accept the device as a new product? Why?

Assuming instead that the required rate of return is 12% rather than 10%,

determine the net present value of the proposed investment rounding present value factors to three decimal places and amounts to whole dollars.

Would you recommend that Harlow accept the device as a new product? Why?

When comparing parts 2 and 3, what general observation do you notice?