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 $444,000 and have a six-year useful life. After six years, it would have a salvage value of about $6,000.

Sales in units over the next six years are projected to be as follows:

Year Sales in Units

1 18,000

2 23,000

3 25,000

46 27,000

Production and sales of the device would require working capital of $60,000 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 $40 per unit.

Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $169,000 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 $ 183,000

3 $ 69,000

46 $ 59,000

The companys required rate of return is 15%.

Click here to view Exhibit 14B-1 and Exhibit 14B-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?