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 $240,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000.
- Sales in units over the next six years are projected to be as follows:
Year | Sales in Units |
---|---|
1 | 13,000 |
2 | 18,000 |
3 | 20,000 |
46 | 22,000 |
- Production and sales of the device would require working capital of $56,000 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 $35 each; variable costs for production, administration, and sales would be $20 per unit.
- Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $151,000 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 | $ 128,000 |
3 | $ 65,000 |
46 | $ 55,000 |
- The companys required rate of return is 17%.
Click here to view Exhibit 12B-1 and Exhibit 12B-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.
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?
EXHIBIT 12B-1 Present Value of $1;(1+r)n1 EXHIBIT 12B-2 Present Value of an Annuity of $1 in Arrears; 1/r(1(1/(1+r)n))
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