Question
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
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: New equipment would have to be acquired to produce the device. The equipment would cost $138,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000. Sales in units over the next six years are projected to be as follows:
Year - Sales in Units
1 7,000
2 12,000
3 14,000
46 16,000
Production and sales of the device would require working capital of $46,000 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 devices would sell for $55 each; variable costs for production, administration, and sales would be $35 per unit. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $149,000 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
12 $ 75,000
3 $55,000
46 $ 45,000
The companys required rate of return is 13%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required:
1. 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.
Incremental contribution margin | year 1 | year 2 | year 3 | year 4-6 |
Incrememental fixed expenses | ||||
Net cash inflow (outflow) |
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.
2-b. Would you recommend that Matheson accept the device as a new product? (yes)
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