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 $486,000 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 18,000 2 23,000 3 25,000 46 27,000 Production and sales of the device would require working capital of $63,000 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 $159,000 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 $ 228,000 3 $ 72,000 46 $ 62,000

The companys required rate of return is 18%.

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?