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Matheson Electronics has just developed a new electronic device it believes will have broad market appeal. The company has performed marketing and cost studies that
Matheson Electronics has just developed a new electronic device it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the following information:
New equipment would have to be acquired to produce the device. The equipment would cost $ and have a sixyear useful life. After six years, it would have a salvage value of about $
Sales in units over the next six years are projected to be as follows:
Year Sales in Units
Production and sales of the device would require working capital of $ to finance accounts receivable, inventories, and daytoday cash needs. This working capital would be released at the end of the projects life.
The devices would sell for $ each; variable costs for production, administration, and sales would be $ per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straightline depreciation on the equipment would total $ per year. Depreciation is based on cost less salvage value.
To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:
Year Amount of Yearly Advertising
$
$
$
The companys required rate of return is
Click here to view Exhibit B and Exhibit B to determine the appropriate discount factors using tables.
Required:
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.
a Using the data computed in above and other data provided in the problem, determine the net present value of the proposed investment.
b Would you recommend that Matheson accept the device as a new product?
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