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 $258,000 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 15,000 2 20,000 3 22,000 46 24,000 Production and sales of the device would require working capital of $58,000 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 $45 each variable costs for production, administration, and sales would be $30 per unit Fixed costs for salaries, maintenance, property taxes, insurance, and straight line depreciation on the equipment would total $147,000 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 $ 67,000 46 $ 57,000 The companys required rate of return is 16 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 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 (Negative amounts should be indicated by a minus sign ) Year 1 Year 2 Year 3 Year 4 to 6 Incremental contribution margin Incremental fixed expenses Net cash inflow (outflow)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Oct 01, 2024

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 $258,000 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	15,000
2	20,000
3	22,000
46	24,000

Production and sales of the device would require working capital of $58,000 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 $45 each; variable costs for production, administration, and sales would be $30 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $147,000 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	$ 67,000
46	$ 57,000

The companys required rate of return is 16%.

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?

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. (Negative amounts should be indicated by a minus sign.)