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 $138,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000.
b.	Sales in units over the next six years are projected to be as follows:

ales in Units 1 7,000 2 12,000 3 14,000 46 16,000

c.

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.

d.

The devices would sell for $55 each; variable costs for production, administration, and sales would be $35 per unit.

e.

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.)

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

$

75,000

3

$

55,000

46

$

45,000

g.	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.