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 $300,000 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 1-10,000 2-15,000 3-17,000 4-6- 19,000
- Production and sales of the device would require working capital of $61,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the project's life.
- The devices would sell for $30 each; variable costs for production, administration, and sales would be $10 per unit.
- Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $174,000 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 1-2 $ 150,000 3 $ 50,000 4-6 $ 40,000
- The company's 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.
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?
Really need help finding the fix expenses for each of the years; along with the net cash flow. Along with that really need help finding the net present value of the current investment; if someone could explain the steps too that would be greatly appreciated.
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